GBP/USD Steadies as Policy Outlook Guides Sentiment

The GBP/USD pair edged higher and traded near 1.3310[1] in Friday's Asian trading after three consecutive sessions of losses. The sterling is thought to be recovering very modestly in a very cautious way and this is because it is believed that the Bank of England (BoE)[2] will continue to pursue a restrictive policy stance over a long period of time. Market reports point out that the BoE policymaker Catherine Mann[3] highlighted the importance of maintaining tight monetary policies in order to contain ongoing inflation and hinted at rate cuts not being on the list soon. Her remarks were a temporary cushion to the pound despite the dampened growth outlook.

Market commentators[4] note that on the UK fiscal front, comments made by Treasury Chief Secretary James Murray helped cement the government's determination to adhere to fiscal discipline, which indicated tightening of the government on wage increases in the public sector. This would help keep inflationary wage pressure at bay but may also curtail household expenditures which would dampen medium-term GBP appreciation. The trade-off between inflation control and economic stagnation is still a major factor under consideration by investors as it shapes sterling sentiment.

Market commentators[5] point out that the US dollar is sustained by a risk-averse atmosphere as the US government continues to shut down, which has contributed to safe-haven purchases. Dollar gains have however been cooled by dovish commentary by Federal Reserve (Fed)[6] officials. Fed’s Mary Daly[7] pointed out downward trends in inflation, and Governor Michael Barr repeated that policy rates are moderately restrictive, in the face of a rate cut in September.

Analysts[8] suggest that the focus will shift to scheduled data on inflation and consumer sentiment in the US, which can impact more on Fed rates expectations. Light readings may drag on the US dollar providing short term sustainability to the GBP/USD[9]. However, uncertainty surrounding UK growth and global risk mood remain medium time downside risks to the pairs.

Market observers believe that GBP/USD exchange rate reflects a cautious recovery supported by hawkish BoE sentiment but tempered by growth uncertainties and global risk factors.

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EUR/USD Steadies as Political Uncertainty Limits Gains

The EUR/USD pair traded around 1.1575[10] in Friday's Asian trading hours, snapping a four-day losing streak. It is believed that the small recovery was more of a technical recovery[11], as traders pocketed profits following recent losses. The Euro remains weak in the face of the continuous political turmoil in France, with President Emmanuel Macron[12] set to give the new Prime Minister later today after the resignation of his predecessor, Sebastian Lecornu. Analysts suggest the fragility in the leadership has cooled euro sentiment, capping the upside in the short run in the pair.

In technical terms, market analysts[13] note that the two are converging just below 1.1600 with short term resistance at 1.1620 and immediate support at around 1.1540. The participants of the market are waiting until the key US economic releases that are scheduled, especially the preliminary University of Michigan Consumer Sentiment Index[14] that may give new hints about the household confidence and inflation expectations. Any negative surprise in the data can weigh on the US dollar and further extend EUR/USD recovery.

Market commentators[15] note that in the Atlantic region, there is mixed sentiment on the greenback as the US government shutdown enters its tenth day. The stalemate has delayed several official economic reports, and it is hard to tell the policy of the Federal Reserve. Recent comments by Fed officials including John Williams[16] and Mary Daly have suggested they will be inclined to further reduce rates, furthering market speculation that further 25 basis-point reduction may take place in October with futures pricing in the probability at 95 per cent according to CMEs FedWatch tool.

Analysts[17] suggest that the euro might get slight relief in the broad softness of the dollar and the repricing of Fed policy. The pair is believed to be skewed toward the negative side of the medium term risks because the issues of political instability in Europe and the low growth potential still dominate the potential to rebound the single currency.

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NZD/USD Rebounds as Shutdown Pressure Weakens Dollar

The NZD/USD pair regained traction and traded towards 0.5750[18] in Friday's Asian trading and snapping a three-day losing streak. The recovery is believed to be taking place in the midst of widespread US dollar[19] weakness, with uncertainty about the continuing US government shutdown, now on its tenth day, pressing on investor mood. The closure has stalled the functions of several key agencies, including the Bureau of Labour Statistics and the Bureau of Economic Analysis[20], impeding the dissemination of important economic data and could make the Fed's review of its policies more difficult before its next meeting.

Market reports[21] point out that at an unexpected decision, the Reserve Bank of New Zealand (RBNZ) reduced the Official Cash Rate by 50 bps to 2.5% at an October meeting in New Zealand. The 50 bps increase is bigger than the anticipated movement of the rate by 25 bps, highlighting the worry of the policymakers in the sluggish domestic demand and international headwinds. Market commentators[22] note that the RBNZ indicated readiness to make further reductions, the size of the cut this week initially pushed the Kiwi down as traders repriced the interest rate difference with the US dollar.

Market commentators[23] expect that investors could be paying closer attention to the planned Friday preliminary University of Michigan Consumer Sentiment Index. With the disruption of data associated with the shutdown, the market will be interested in the possibility of the decline of sentiment due to fiscal uncertainty. Analysts[24] indicate that a lower-than-anticipated print would add to the anticipation of decreased US consumption and encourage short-term NZD/USD appraisals.

Analysts[25] suggest that the short-term outlook of the two is favourable due to US dollar weakness and risk-on today, but the medium-term risks are skewed towards the downside. Further reduction of the RBNZ[26] rates alongside the worry of a sluggish growth in the world and the demand of commodities would perhaps limit Kiwi profits and restrict a steady increase above the 0.5800 resistance band.

EUR/GBP Advances as Euro Gains Policy Support

The EUR/GBP pair extended its upward momentum for the second consecutive session and traded near 0.8700[27] in Friday's Asian hours. The euro is believed to have strengthened after the European Central Bank (ECB)[28] policy meeting minutes in September, in which the policy makers said that the current monetary policy is considered to be sufficient to meet the 2 percent medium-term inflation target. Analysts[29] indicate that reassertion that rates are tight enough to offset the risk of upside and downside inflation provided a slight boost to the euro and assisted the cross in maintaining positive gains above its short-term moving averages.

Market reports[30] indicate that political instability in France will pose a threat to euro sentiment in the immediate future. The resignation of Prime Minister Sebastien Lecornu[31] has increased investor apprehension about fiscal sustainability in the second largest economy in the Eurozone. As President Emmanuel Macron[32] is anticipated to designate a new prime minister in the coming weeks, the markets are likely to be careful until there is political certainty. Analysts[33] suggest a long period of uncertainty may trigger investors to cut their euro exposures especially to the pound, which is still enjoying reasonably stable domestic policy expectations.

Market commentators[34] note that the pound was further supported by the recent remarks of Bank of England (BoE) policymaker Catherine Mann who said that policy settings would have to remain restrictive over an extended period. Her comments supported presumptions that the BoE will be gradual in reversing towards lower interest rates, which underlies short-term GBP strength. Meanwhile, the fact that the UK Treasury[35] demands that public sector wage expenditure be subject to control, further underscores the adherence to fiscal discipline, which undeniably smacks of sterling spirit.

Market observers[36] point out that the focus may shift to the scheduled US economic information, such as consumer sentiment and inflation levels, which may affect the global risk appetite. Analysts[37] suggest that the US weaker figures could undermine the dollar in the wider sense, which will indirectly favour the euro and GBP. The euro political head winds may, however, restrain EUR/GBP[38] gains above the 0.872008750 zone in the medium term, with robust UK statistics potentially mitigating any further gains in the euro.

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