Hawkish Fed minutes halt risk rally

Lawrence Kaplin
Lawrence Kaplin 06 January 2022
GBP: Calls for more government support
EUR: Rangebound   
USD: Rebounding

Sterling

Markets reacted quickly and decisively yesterday evening following the release of an extremely hawkish set of Fed minutes, taking sterling back down to last year's closing levels. Despite growing concern over an upcoming UK cost of living crisis, earlier in the trading session, the broad risk-on environment saw sterling post fresh 2-month highs against the US dollar before the news from the Fed sent stocks and risk on markets on a wild ride lower. With UK NI tax set to rise by 1.25% from April and energy prices continuing to soar ahead of the planned February energy price-cap review, calls for additional Government support are growing from all sides. In the face of shrinking household disposable income, market pricing for a further 3 to 4 rate hikes this year seems extremely optimistic.

There are no economic releases scheduled for today.

Euro

The euro continues to trade in a very tight range as the ECB maintain their benign monetary policy. Whilst other Central banks have been very reactive in their fight against rising prices, the ECB continue to stick with their inflation is “transitory” mantra and reiterated rates will not rise before 2023. 

German inflation data is set to be released at 1pm.

 

US dollar

The US dollar rose sharply yesterday following the December Federal Reserve minutes. In the latest release, the Central Bank signalled that it could become even more aggressive about removing stimulus and raising interest rates later this year, depending on how the economic recovery progresses. Markets were swift and brutal in their reaction sending risk assets sharply lower. US interest rate markets immediately moved the timing of the first-rate hike forward from June to March and perhaps more tellingly have now started to price in the probability of an additional 4th rate rise this year. All eyes are now firmly focussed on Friday’s key monthly employment report.

ISM data is due to be released at 3pm.

 

Market rates

Today's Interbank Rates at 08:06 against sterling movement vs yesterday.

Euro €1.195 ↓
US dollar $1.350 ↓
Australian dollar $1.886 ↑
South African rand R21.48 ↓
Japanese yen ¥156.5 ↓

Have a great day.