British Pound holds losses amid geopolitical tensions, Fed tightening hopes
- GBP/USD remains capped below 1.3550, just above two-week highs on Monday.
- Fresh hostilities in Iran are wighing on risk appetite and supporting the safe-haven US Dollar.
- Fed's Warsh boosted bets of an upcoming rate hike on his speech at Jackson Hole on Friday.
The British Pound (GBP) edges up on Monday but remains close to two-week lows against the US Dollar (USD). Risk aversion amid fresh hostilities between the US and Iran and rising bets that the US Federal Reserve (Fed) might finally hike rates in September are keeping the Greenback's dips subdued at the start of the week.
Investors' appetite for risk remains frail on Monday, following reports that the US launched the first attack on Iran in about a month, targeting missile launchers on Larak Island, where the Islamic Revolutionary Guard Corps (IRGC) were allegedly preparing rockets to place sea mines in the Strait of Hormuz.
Tehran responded by attacking US military sites in Jordan, according to reports by Fox News citing a US source, and the IRGC vowed “response and punishment” to the US.
Fed Warsh hints at rate hikes
The US Dollar ended last week on strong footing, boosted by comments by Fed Chairman Kevin Warsh at the Jackson Hole Summit, hinting at upcoming monetary tightening moves if inflationary pressures remain at high levels.
FX strategists at OCBC note that “debasement concerns faded following Fed Chair Warsh's Jackson Hole speech, with the USD strengthening, gold falling and the US yield curve flattening.” Warsh “stressed that inflation remains too high and remains the Fed's primary concern.” This has reaffirmed the central bank's commitment to achieving its “2% PCE inflation target,” say the analysts in a note.
Against this backdrop, OCBC suggests that “USD dips may also prove more restrained for now, with USD bears likely needing softer US data to rebuild conviction.” They add that “focus turns to incoming US labour and inflation data ahead of the Sept FOMC,” as markets reassess the near-term policy path in light of Warsh’s remarks and the evolving data pulse.
The UK calendar is thin on Monday, and markets will be attentive to the G20 finance ministers' meeting in North Carolina, starting on Monday and, where US Treasury Secretary Scott Bessent will strive to convince the world's major economies, namely China, to sever its links to Iran, while trying to calm growing concerns about the ballooning US government debt and rising bond yields.
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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