- The Pound Sterling faces pressure above 1.2580 on cautious sentiment.
- The UK Manufacturing PMI signaled expansion in March for the first time in two years.
- Investors see the BoE kick-start the rate-cut cycle in June.
The Pound Sterling (GBP) struggles to extend recovery above 1.2580 in Wednesday’s late London session. Caution among market participants ahead of the United States Nonfarm Payrolls (NFP) data for March has offset the positive impact of the United Kingdom (UK) Manufacturing PMI’s return to growth.
The UK Manufacturing PMI surprisingly expanded in March after contracting for 20 months, driven by upbeat domestic demand for consumer goods. S&P Global/CIPS reported that business optimism rose to its highest level since April 2023, with 58% of manufacturers expecting their level of production to increase over the coming 12 months. The agency added: “Improved sentiment reflected signs of stronger demand, new product launches, a better trading environment, export opportunities and hopes the cost and supply situations would move closer to normal conditions.”
This week, the GBP/USD pair will be influenced by the US labor market data and market expectations about when the Bank of England (BoE) will start reducing interest rates. Currently, investors’ expectations for rate cuts have been brought forward to the June policy meeting from prior anticipation for August after UK inflation softened more than expected in February.
Daily digest market movers: Pound Sterling consolidates ahead of US data
- The Pound Sterling ranges slightly below 1.2600 against the US Dollar (USD) ahead of key events. Investors shift focus to the speech from Federal Reserve Chairman Jerome Powell, which is expected at 16:10 GMT, and the United States NFP data, which will be published on Friday.
- The speech from Fed Powell could provide more cues about when the central bank will start reducing interest rates. Currently, investors expect that the Fed will start reducing borrowing costs from the June meeting. The US Dollar Index (DXY) retreats from a fresh four-month high of 105.10. In today’s session, investors will focus on the ISM Services PMI and the ADP Employment Change data for March.
- On Tuesday, the upbeat S&P Global/CIPS Manufacturing PMI for March supported a rebound for the Pound Sterling. The agency reported that the Manufacturing PMI returned to expansion after contracting for 20 straight months. The Manufacturing PMI rose to 50.3, above the 50.0 threshold, beating expectations and the prior reading of 49.9.
- Apart from the strong recovery in the Manufacturing PMI, British house prices rose 1.6% in March, the highest pace since December 2022. The activity in the housing sector has picked up despite the Bank of England maintaining interest rates at higher levels.
- A strong recovery in the manufacturing and real estate sectors suggests that the recession in the second half of 2023 was likely shallow and that the economy has returned to growth. In such a case, the BoE could achieve a so-called “soft landing” – a situation when an economy gets inflation under control without triggering a recession.
- Going forward, investors will focus on the S&P Global/CIPS Services PMI final data for March, which will be published on Thursday. The Services PMI is forecasted to have remained unchanged from its preliminary reading of 53.4.
Technical Analysis: Pound Sterling struggles to stretch recovery above 1.2580
The Pound Sterling faces selling pressure while testing the breakout of last week’s consolidation formed in a range between 1.2575 and 1.2668. The Cable struggles to sustain above the 200-day Exponential Moving Average (EMA), which trades around 1.2570.
On a broader time frame, the horizontal support from December 8 low at 1.2500 would provide further cushion to the Pound Sterling. Meanwhile, the upside is expected to remain limited near an eight-month high of around 1.2900.
The 14-period Relative Strength Index (RSI) dips below 40.00. If it sustains 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.
