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Pound Sterling slumps against US Dollar amid caution ahead of Fed policy

  • The Pound Sterling falls to 1.2530 as investors turn cautious ahead of the Fed’s policy announcement.
  • Investors will also focus on US Manufacturing PMI and labor market data in addition to the Fed’s policy.
  • Market expectations for UK interest rates will guide the Pound Sterling.

The Pound Sterling (GBP) edges down from a two-week high of 1.2570 but holds above the psychological support of 1.2500 against the US Dollar (USD) in Tuesday’s early American session. The GBP/USD pair comes under pressure as investors await the US Federal Reserve’s (Fed) monetary policy announcement on Wednesday for fresh guidance.

A data-packed week in the United States will keep the US Dollar on tenterhooks. On the other side of the Atlantic, the United Kingdom’s economic calendar is light. Therefore, market speculation for the Bank of England’s (BoE) interest rate policy on May 9 will guide the Pound Sterling. The BoE is expected to maintain the status quo, but guidance on interest rates is expected to be slightly on the dovish side.

BoE Governor Andrew Bailey is confident about a sharp decline in the headline inflation of April and sees market expectations for two or three rate cuts this year as reasonable. Also, BoE Deputy Governor Dave Ramsden has predicted that risks of inflation remaining persistent have receded. The BoE could shed more light on the time frame from when it could start reducing interest rates. Market participants remain divided between June or August meetings from when the BoE could pivot to interest rate cuts.

Daily digest market movers: Pound Sterling falls as US Dollar rebounds on higher Q1 Employment Cost Index

  • The Pound Sterling struggles to extend upside above the immediate resistance of 1.2560 against the US Dollar. The US Dollar rebounds sharply as the Q1 Employment Cost index grew at a stronger pace of 1.2% from the consensus of 1.0% and the prior reading of 0.9%. The higher Employment Cost Index suggests rising wage growth, which feeds consumer price inflation.
  • Going forward, the major event for investors will be the Federal Reserve’s interest rate decision, which will be announced on Wednesday.  Investors will keenly focus on the interest rate guidance as policymakers are expected to vote for holding interest rates steady in the range of 5.25%-5.50%.
  • Inflation measures for March have indicated that price pressures remain persistently higher due to robust consumer spending and tight labor market conditions. This would force the Fed to support the argument of keeping interest rates higher for a longer period. Fed policymakers are expected to continue with their current monetary policy framework until they get sufficient evidence that inflation will sustainably return to the desired rate of 2% target.
  • The US Dollar Index (DXY) rebounds to near 106.00 on expectations that the Fed will maintain a hawkish guidance. Before the Fed policy, investors will watch the ADP Employment Change and the ISM Manufacturing Purchasing Managers Index (PMI) data for April. US private employers are forecasted to have hired 179K job-seekers, slightly lower from the prior reading of 184K.
  • The US ISM PMI is expected to remain above the 50.0 threshold that separates expansion from contraction but will drop slightly to 50.1 from 50.3. On the same, the survey by S&P Global for April showed that the factory data fell below the 50.0 threshold. The agency reported a sharp decline in the scale of production and new orders due to inflationary pressures, weak demand and sufficient stock holdings at customers.
  • Later this week, the US Dollar will be guided by the Nonfarm Payrolls (NFP) report for April, which will be published on Friday.

Technical Analysis: Pound Sterling holds the 1.2500 support

The Pound Sterling falls from a two-week high of 1.2570 against the Greenback. The GBP/USD pair struggled to extend its upside reaching the breakdown region of the Head and Shoulder chart pattern formed on a daily timeframe. The Cable witnessed a sharp fall after breaking below the crucial support of 1.2535 on April 12, but it has recovered recent losses since then. 

Cable’s near-term outlook has improved as it trades comfortably above the 20-day Exponential Moving Average (EMA), which is around 1.2516. 

The 14-period Relative Strength Index (RSI) shifts into the 40.00-60.00 range, suggesting a consolidation ahead.

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.


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