By Areena Fx- The Pound Sterling finds strong buying interest as the UK inflation came in higher than expected.
- Higher fuel services prices boosted UK inflation.
- The market mood remains downbeat as investors are less certain about Fed rate cuts.
The Pound Sterling (GBP) has surrendered some gains as the United States Retail Sales turned out significantly upbeat than expectations. The US Census Bureau has reported that consumer spending grew strongly by 0.6% against expectations of 0.4% and the former reading of 0.3%. Retail Sales excluding automobiles rose by 0.4% against expectations and the prior reading fo 0.2%.
Earlier, gains in the Cable were boosted by the release of the surprisingly stubborn United Kingdom consumer price inflation data for December. The GBP/USD pair recovers losses as hopes of an early rate cut by the Bank of England (BoE) have waned amid higher price pressures. The Consumer Price Index (CPI) came in higher than expected amid a significant rise in Oil prices and slightly higher service inflation.
Still-high inflation in the UK means that BoE policymakers have more room to maintain interest rates at the current 5.25% for a longer period. BoE policymakers have been warning that it is too early to discuss interest rate cuts as price pressures are far above the required rate of 2%.
Meanwhile, a sharp recovery in the Pound Sterling could stall as the market mood is quite cautious. Market sentiment has turned downbeat as investors are uncertain over when the Federal Reserve (Fed) will start the rate-cut campaign.
Daily digest market movers: Pound Sterling eases as US Dollar advances
- Pound Sterling delivers a V-shape recovery as UK inflation data for December has turned out stubbornly higher while investors anticipated it to remain soft.
- The UK ONS has reported that monthly headline inflation grew at a stronger pace of 0.4% against expectations of 0.2%. In November, headline inflation contracted by 0.2%.
- The annual headline inflation rose to 4.0% from 3.9% in November. Market participants anticipated a deceleration to 3.8%.
- Core consumer price inflation, which excludes volatile food and energy prices, remained at 5.1% while investors projected it softening to 4.9%.
- A sharp increase in price pressures suggests that taming the last leg of inflation is expected to be a challenge for Bank of England policymakers. This will offer a strong argument to BoE policymakers to maintain a restrictive monetary policy stance for a longer period.
- Traders are expected to pare higher bets supporting an early rate cut from the BoE, which were boosted on Tuesday after a sharp decline in wage growth. The Pound Sterling witnessed a sharp sell-off in Tuesday’s session on slower wage growth and dismal market mood.
- The market mood remains downbeat as traders pare bets in favour of rate cuts by the Federal Reserve from March after the hawkish commentary from Governor Christopher Waller.
- Waller said the Fed should not rush to reduce interest rates until it gets confident that inflation will return to the 2% target sustainably.
- The US Dollar Index (DXY) has printed a fresh monthly high above 103.50 as investors’ confidence over a Fed rate cut in March is fading.
- Going forward, the USD Index will be guided by the United States Retail Sales and the Industrial Production data for December. According to estimates, monthly Retail Sales are expected to grow 0.4% against 0.3% in November. Industrial Production is seen stagnant against 0.2% growth a month earlier.
Technical Analysis: Pound Sterling falls from 1.2700
Pound Sterling delivers a swift recovery after discovering strong buying interest near the round-level support of 1.2600. The GBP/USD pair has rebounded after testing the 50-day Exponential Moving Average (EMA), which trades around 1.2600. The near-term demand for the Cable will improve if it stabilizes above the 20-day EMA, which oscillates around 1.2690.
The GBP/USD pair manages to hold auction above the 50% Fibonacci retracement at 1.2590 (of the move from July 13’s high at 1.3142 to October 4’s low at 1.2037). The 14-period Relative Strength Index (RSI) oscillates in the 40-60 range, which indicates a listless performance.
RISK SENTIMENT FAQS
What do the terms”risk-on” and “risk-off” mean when referring to sentiment in financial markets?
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.
What are the key assets to track to understand risk sentiment dynamics?
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.
Which currencies strengthen when sentiment is “risk-on”?
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.
Which currencies strengthen when sentiment is “risk-off”?
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.