Broad US Dollar weakness lifts British Pound to session highs at 1.3420

Improved risk appetite weighs on the US Dollar, lifting GBP/USD to 1.3420 from below 1.3350.
Oil holds close to two-month lows as investors hope for a negotiated resolution to the war in Iran.
Further USD weakness is likely to be contained by robust US economic data and expectations of Fed tightening.

A brighter market mood is weighing on the US Dollar (USD) on Monday, helping the British Pound (GBP) recover the bulk of its losses over the previous two days. At the time of writing, GBP/USD is trading around 1.3420 following a rebound from Friday’s lows below 1.3350. Bulls are now looking towards last week’s highs near 1.3500.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

With risk appetite improving on Monday, investors are moving out of the US Dollar and into currencies perceived as riskier, including the British Pound. Reports of headway in US-Iran peace negotiations have, at least for now, outweighed last week’s concerns over an AI bubble. The prospect of a deal is also holding oil prices steady near two-month lows.

With no major US or UK data releases scheduled for Monday, the Pound is finding some support in the hawkish tone of last week’s Bank of England (BoE) monetary policy statement. Last Thursday, the BoE moved interest rates by a quarter point to 4%, while some policymakers argued that further increases were needed to return inflation to target. Governor Bailey backed that position, keeping the option of additional monetary tightening open.

Could robust US data and Fed rate hike expectations cushion USD declines?

The US economic backdrop, however, has favoured the Dollar. An above-forecast October Nonfarm Payrolls (NFP) reading, alongside a decline in the Unemployment Rate, provided conditions conducive to further Fed tightening. Following the NFP release, Fed policymakers highlighted elevated inflation pressures, raising hopes of a December rate hike.

Attention this week therefore turns to Tuesday’s US Consumer Price Index (CPI) release. The figures are expected to indicate a further acceleration in prices during October.

According to strategists at ING, “contagion from AI to defensive stocks in the US and worldwide allowed the Dollar to rally even before the strong US jobs market report.” They nevertheless warn that the rally could be brief, noting 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: common questions

How do “risk-on” and “risk-off” describe financial market sentiment?

Investors’ willingness to accept risk over a given period is commonly described in financial markets using the terms “risk-on” and “risk off”. Optimism about the outlook characterises a “risk-on” market, encouraging investors to purchase riskier assets. By contrast, concerns about the future prompt investors in a “risk-off” market to ‘play it safe’. They favour lower-risk assets offering greater certainty of a return, even if that return is relatively modest.

Which assets offer the clearest indications of changing risk sentiment?

A positive growth outlook usually supports equities and most commodities, with the exception of Gold, during “risk-on” periods. Higher demand also strengthens the currencies of major commodity-exporting countries, while cryptocurrencies advance. When markets turn “risk-off”, bonds typically rise, particularly those issued by major governments. Gold performs well too, alongside safe-haven currencies including the Japanese Yen, Swiss Franc and US Dollar.

Which currencies typically gain in a “risk-on” market?

Currencies that generally benefit from “risk-on” conditions include the Australian Dollar (AUD), Canadian Dollar (CAD) and New Zealand Dollar (NZD), as well as minor currencies such as the Ruble (RUB) and South African Rand (ZAR). Growth in their economies depends heavily on commodity exports. As investors anticipate stronger economic activity and, consequently, greater future demand for raw materials, commodity prices tend to increase during risk-on periods, supporting these currencies.

Which currencies tend to benefit from “risk-off” conditions?

During “risk-off” periods, the US Dollar (USD), Japanese Yen (JPY) and Swiss Franc (CHF) are the major currencies that usually appreciate. The Dollar draws support from its role as the world’s reserve currency and from crisis-driven purchases of US government debt. Investors regard that debt as safe because the world’s largest economy is considered unlikely to default. Demand for Japanese government bonds supports the Yen: a large share of these bonds is owned by domestic investors who are unlikely to sell them off, even during a crisis. For the Swiss Franc, the attraction lies in Switzerland’s strict banking laws, which provide investors with greater capital protection.