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All change at the Fed

Lawrence Kaplin
Lawrence Kaplin 01 December 2021

GBP: Onlooker

EUR: Inflation soars

USDPowell shocks markets  

Sterling

With no economic data releases yesterday, sterling continued to trade in a fairly tight range dipping briefly below $1.32, as markets remained more focussed on events elsewhere. The overnight news that the Moderna CEO did not think the current vaccines will be as effective against Omicron saw markets move quickly to the downside once again, taking sterling lower. Traders are now starting to focus on the next BoE PMC meeting scheduled for December 16th where expectations for a rise in rates have fallen dramatically over the last 2 weeks from what was a certainty to now a 40% probability.

There is one minor UK economic data point due out this morning in the form of manufacturing PMI, and BoE Governor Bailey is due to speak this afternoon.

 

Euro

The single currency rose to its highest levels in 2 weeks yesterday, after eurozone inflation surged to a record high. The euro received a further boost from the general risk-off market sentiment as yet again it attracted large safe-haven flows. With no major data releases slated for today once again the euro is likely to take its cue from broader market sentiment.

 

US dollar

The dollar initially traded higher yesterday after Fed Chair Powell caught markets completely by surprise with his about-turn on inflation. For so long the Fed has insisted we look through the high levels of inflation as “transitory” and should expect a return to much lower levels in the near future. This all changed yesterday with Powell now saying, “it’s time to retire the word transitory when referring to inflation” and went one stage further by adding “we should look at wrapping up the taper months earlier”. Markets were very quick to react, Bond yield surged, and equities tumbled as the threat of the removal of “easy” money spooked markets.

Interest rate markets brought forward their timing of the 1st rate hike from September to July adding further support to the dollar. Following Powell’s U-turn, what was expected to be an uneventful next Federal Reserve meeting due December 15th, will now be anything but, as markets will be expecting further commentary on when the Fed will end their asset purchase programme and start to raise interest rates.  

A fairly busy economic calendar is slated for the US today with the ADP private employment report the highlight as it is often used by the markets as a proxy for the upcoming Government Monthly jobs report due Friday.  

 

Elsewhere

Following the negative Omicron news yesterday, commodity currencies in particular were hit very hard with the AUD and NZD both registering new lows against the $ for the year. With more countries increasing both domestic and travel restrictions markets remain extremely sensitive to Omicron news.

 

Market rates

Today's Interbank Rates at 08:19 against sterling movement vs yesterday.

Euro €1.173 ↓
US dollar $1.330 ↓
Australian dollar $1.862 ↓
South African rand R21.07 ↓
Japanese yen ¥150.9 ↑

Have a great day.