- Sterling fell as investors turned their attention to the UK jobs report.
- Weak wage growth data will soften the inflation outlook and raise expectations that the Bank of England will cut interest rates.
- Market volume remains thin in the US market as the weekend drags on.
Pound Sterling (GBP) is facing a decline ahead of UK labor market data for the three months to November, which will be released on Tuesday. Investors are expecting a sharp decline in wage growth, with interest rate hikes by the Bank of England (BoE) and a deepening cost-of-living crisis amid stubborn consumer inflation, with labor market conditions set to cool further. Expect.
Weaker wage growth data would improve progress towards a return to 2% inflation, as lower incomes ultimately lead to lower purchasing power for households. Robust increases in wage growth remain the main driver of consumer price inflation, and any decline would be further reassurance for BoE policymakers.
With US markets closed on Monday, the GBP/USD pair is likely to remain static. Volume is expected to remain low due to the long weekend. However, persistent bets on the Federal Reserve's support for rate cuts at its March monetary policy meeting will likely continue to underperform the US dollar index (DXY).
Daily Digest Market Movers: Sterling falls as risk appetite declines
- Sterling fell sharply as investors turned their attention to British labor market data for the three months to November, which will be released on Tuesday.
- Labor demand is expected to remain weak, with job openings by UK employers falling by 32% in December compared to the same month last year. The Employment and Employment Confederation (REC) department said formal employment declined throughout 2023.
- Investors expect the unemployment rate to rise slightly to 4.3% from 4.2% previously.
- Market participants will be keeping an eye on average income data, as strong wage growth remains the key driver for sustaining higher consumer price inflation in the UK economy.
- Average profit excluding bonuses is expected to slow significantly to 6.6% compared to 7.3% quarter-to-October growth, while profit data including bonuses is expected to slow to 6.8% from 7.2% in the same period. has been done.
- A sharp fall in wage growth would reduce fears of sustained inflation and increase the likelihood of an early interest rate cut by the Bank of England.
- Bank of America (BofA) expects the BoE to consider cutting interest rates after its August monetary policy meeting. This is in contrast to the prior forecast of February 2025.
- On the contrary, central bank policymakers are not publicly discussing interest rate cuts at all, as the UK economy has the highest rate of consumer price inflation compared to other G7 countries.
- Bank of England policymakers have repeatedly stressed the need to keep interest rates on an upward trajectory to ensure inflation returns to 2% sustainably.
- The UK property sector was weak in 2023, but has made a good start to 2024. Leading UK property platform Rightmove reported that asking prices rose by 1.3% between December 3 and January 6, the highest since 2020.
- The U.S. market is in a quiet mood as the weekend drags on due to Martin Luther King Jr.'s Day.
- The U.S. Dollar Index (DXY) has been bouncing back and forth around 102.40 as investors' attention shifts to monthly retail sales data and the Federal Reserve's Wednesday Beige Book release.
- Meanwhile, investor confidence in the Fed's decision to cut interest rates in March improved following the release of the December Producer Price Index (PPI) report, which was weaker than expected.
- The probability of supporting a March rate cut has improved to 70% after dropping to 62% last week, according to the CME FedWatch tool.
Technical analysis: GBP remains at 1.2700
Sterling has found offers but remains above key support at 1.2700 as investors await key UK data for further action. The GBP/USD pair has fluctuated in the range of 1.2674 to 1.2784 over the past week. The broad appeal remains bullish as the 20-day and 50-day exponential moving averages (EMAs) are trending up. The 14-period Relative Strength Index (RSI) has fluctuated between 40.00 and 60.00, suggesting further consolidation. If cable manages to break above its five-month high near 1.2820, a new rally is expected.
Frequently asked questions about risk sentiment
In the world of financial terminology, two terms are widely used: “risk-on” and “risk-off” to refer to the level of risk an investor is willing to accept during a given period of time. In a “risk-on” market, investors are optimistic about the future and are more willing to buy risky assets. In a “risk-off” market, investors begin to “play it safe” out of fear for the future, so they buy low-risk assets that are guaranteed to yield a return, even if it is a relatively small amount.
Typically, during “risk-on” periods, the stock market rises, and so do the values of most commodities, except gold. This is to benefit from positive growth prospects. The currency of a country that is a large exporter of primary products will appreciate due to increased demand, and the virtual currency will appreciate. In a “risk-off” market, bonds, especially major government bonds, rise, gold shines, and safe-haven currencies such as the Japanese yen, Swiss franc, and US dollar all profit.
Minor currencies such as the Australian dollar (AUD), Canadian dollar (CAD), New Zealand dollar (NZD), ruble (RUB) and South African rand (ZAR) all tend to rise in “riskier” markets. This is because the economies of these currencies rely heavily on commodity exports for growth, and commodity prices tend to rise during risk-on periods. High economic activity This is because investors are anticipating an increase in demand for raw materials in the future.
The major currencies that tend to appreciate during “risk-off” periods are the US dollar (USD), the Japanese yen (JPY), and the Swiss franc (CHF). The U.S. dollar is the world's reserve currency, because investors buy U.S. government bonds in times of crisis, and is considered safe because the world's largest economy is unlikely to default. The yen is due to increased demand for Japanese government bonds, and since a high percentage of the value is held by domestic investors, there is little chance of a fire sale of government bonds even in times of crisis. The Swiss Franc is a popular choice because Switzerland's strict banking laws provide investors with greater capital protection.
