Market Data 
- The Pound Sterling weakens against the US Dollar as Fed rate cut prospects for June and July faded.
- UK monthly GDP data for February will provide cues about the current state of the economy.
- The BoE is expected to start lowering interest rates earlier than the Fed.
The Pound Sterling (GBP) extends its downside in Thursday’s London session after an intense sell-off that dragged the Cable to a two-month low near 1.2520. The near-term appeal of the GBP/USD pair has weakened as the US Dollar strengthens after traders dialled back bets supporting rate cuts by the Federal Reserve (Fed) in the June and July policy meetings.
Persistently higher United States Consumer Price Index (CPI) and Nonfarm Payrolls (NFP) data for March suggested that the Fed may not opt for rate cuts in the near term as these could ramp up price pressures. Also, the Federal Open Market Committee (FOMC) Minutes for the March meeting, released on Wednesday, indicated that policymakers remain worried about the inflation readings for the first two months of the year.
The US Dollar Index (DXY), which tracks the US Dollar’s value against six major currencies, prints a fresh more than four-month high near 105.30.
Meanwhile, waned Fed rate cut expectations for the June and July meetings have deepened fears of a prolonged policy divergence between the Fed and the Bank of England (BoE). The BoE is anticipated to begin reducing interest rates in June as inflation in the United Kingdom has slowed steadily for the last two months. Also, slower economic growth projections and easing labor market conditions would boost expectations for the BoE to pivot to rate cuts sooner. This scenario bodes poorly for the Pound Sterling.
Daily digest market movers: Pound Sterling sees more downside on risk-off mood
- The Pound Sterling trades above the psychological support of 1.2500. The currency remains on the back foot against the US Dollar as market sentiment turns risk-off after investors push back Federal Reserve rate cut expectations. S&P 500 futures have extended their downside in the European session after plunging almost 1% on Wednesday.
- Hot United States inflation data for March, combined with robust labor demand, forced traders to pare big bets supporting Fed rate cuts. Meanwhile, investors’ confidence in three rate cuts by the year-end has also waned, and they are now anticipating only two.
- The US CPI has risen by more than expected for straight three months, suggesting that the Federal Reserve will opt to continue to hold interest rates steady in the range of 5.25%-5.50%. Price pressures remained stubbornly higher in March due to a significant rise in gasoline prices, rentals, and insurance costs.
- On the United Kingdom front, the monthly Gross Domestic Product (GDP) and factory data for February, which will be published on Friday, will guide the next move in the Pound Sterling. The monthly GDP data, which represents the state of the economy, are forecasted to have grown at a slower pace of 0.1% after expanding by 0.2% in January.
- Economists have forecasted that monthly Industrial Production data will remain stagnant after contracting by 0.2% in January. On year, Industrial Production is estimated to have increased 0.6% from the prior reading of 0.5%. Monthly Manufacturing Production is expected to have increased by a meagre 0.1% after remaining stagnant in January. On an annual basis, the economic data is anticipated to rise at a higher pace of 2.1% against the former reading of 2.0%.
- The UK factory data is a leading indicator of overall demand from domestic and overseas markets. Upbeat factory data would boost hopes of the UK economy coming out of the technical recession.
Technical Analysis: Pound Sterling sees downside near 1.2500
The Pound Sterling declines towards the psychological support of 1.2500 on risk-aversion mood. The GBP/USD pair dips to the 200-day Exponential Moving Average (EMA) at 1.2570, which remained a major support before the release of the hot US CPI data. The Cable could witness a sharp downside if it decisively breaks below the 1.2500 support.
The 14-period Relative Strength Index (RSI) hovers near 40.00. If it drops below this level, bearish momentum will trigger.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
