Empire State building NYC

Dollar fights back

Lawrence Kaplin
Lawrence Kaplin 19 January 2022

GBP: Inflation hits 30-year high

EUR: Hurt by rising energy prices

USDYields on fire

 

Sterling

Sterling pulled back further from its recent highs yesterday, hitting a one-week low versus the dollar following the latest UK employment report which showed a record 184,000 employees were added to the payroll, but that earnings growth had slowed to its weakest in real terms since July 2020. The latest monthly report reflected the growing cost-of-living crisis, with inflation-adjusted pay dropping by 1% in the month of November alone. In response, Chancellor Sunak said the high level of inflation was a global issue driven by high energy prices and supply chain problems. Despite inflation data released this morning showing the headline rate rising further to 5.4%, the pound has edged lower as markets have already very aggressively priced in 4+ rate hikes for 2022. Attention will now focus on BoE Governor Bailey, who is due to appear before the Treasury Select Committee today at 2:15pm and Friday’s key Retail Sales report.

No further economic releases are scheduled for today.

 

Euro

The euro fell sharply versus the US dollar yesterday despite upbeat German data showing economic sentiment had risen to a 6-month high on expectations that Omicron cases have peaked, and that Europe’s largest economy will pick up and return to pre-pandemic levels of GDP over the coming months. Concerns over rising energy costs were accentuated as oil prices trade at their highest level since 2014, putting a further squeeze on the European consumer whose energy bills are already 50% higher than this time last year. German annual inflation data released this morning confirmed initial estimates, coming in at 5.3% and sending 10-year German Bond yields into positive territory for the first time since 2019. Markets will now focus on tomorrow’s Eurozone inflation data where the headline inflation rate is expected to hit 5%.

No further economic releases are scheduled for today.

 

US dollar

The dollar posted its biggest daily rise in two-weeks, with the dollar index hitting a one-week high on Tuesday as US Bond yields continued to soar higher, with the benchmark US 10-year rising to a two-year high. With no major economic releases scheduled for this week and the Fed now under a media blackout ahead of next week’s FOMC rate-setting meeting, the currency has been closely tracking rising interest rates higher.

Given the near 40-year high in US inflation, markets are just starting to price in the possibility that the first hike in rates expected in March, may well have to be 0.50%, a doubling of the current 0.25% anticipated move, in order to combat 2nd round inflationary effects becoming further embedded.

US mortgage applications due 12.00.

 

Market rates

Today's Interbank Rates at 08:10 against sterling movement vs yesterday.

Euro €1.199 ↑
US dollar $1.359 ↓
Australian dollar $1.892 ↓
South African rand R21.03 ↓
Japanese yen ¥155.5 ↓

 

Have a great weekend.