British Pound hits session highs at 1.3420 amid broadbased US Dollar weakness
- GBP/USD jumps to 1.3420, from lows below 1.3350 as risk appetite hits the US Dollar.
- Hopes of a negotiated end to Iran's war are keeping oil prices near two-month lows.
- Strong US macroeconomic data and Fed tightening expectations are likely to keep USD's weakness limited.
The British Pound (GBP) is taking back most of the previous two days’ losses on Monday, favoured by the US Dollar’s (USD) weakness amid positive market sentiment. The GBP/USD pair is trading at the 1.3420 area at the time of writing after bouncing from lows below 1.3350 on Friday and with last week’s highs, near 1.3500, on the bulls’ focus.
Investors are selling the US Dollar on Monday, in favour of riskier-perceived currencies, like the British Pound, amid an improved risk mood. News of progress in the negotiations to reach a peace deal between the US and Iran has offset last week’s fears about an AI bubble, at least for now, and is keeping Oil prices steady at levels near two-month lows.
In the absence of key US or UK releases on Monday, the British Pound is drawing some support from a hawkishly tilted monetary policy statement by the Bank of England (BoE)last week. The BoE shifted interest rates by a quarter point to 4% last Thursday, with some policymakers calling for further rate hikes to bring inflation to target. Governor Bailey supported those views and left the doors open for further monetary tightening.
Strong US data and Fed hiking expectations to limit USD dips
US macroeconomic data, however, has been US Dollar-supportive. October’s Nonfarm Payrolls (NFP) data beat expectations, and the Unemployment Rate declined, setting the appropriate conditions for the Fed to tighten its monetary policy further. Fed policymakers warned about the high inflation pressures after the NFP release, which boosted hopes of a December rate hike
Against this background, the focus this week is on the US Consumer Price Index data (CPI), due on Tuesday, which is expected to show that prices accelerated further in October.
Strategists at ING observe thst “contagion from AI to defensive stocks in the US and worldwide allowed the Dollar to rally even before the strong US jobs market report.” However, they caution that the move may prove short-lived, arguing that “unless risk sentiment remains poor this week, lower front-end US rates should favour a weaker Dollar, even if inflation tomorrow comes in slightly hotter than expected.”
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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