Markets look past Omicron

Lawrence Kaplin
Lawrence Kaplin 05 January 2022

 

  • GBPRelief rally continues
  • EUR: ECB “inflation close to peaking”  
  • USD: Yields surge

 

Sterling

Sterling enjoyed another positive trading session yesterday following the news that UK PM Johnson will not introduce any further tightening of Covid restrictions. At a press conference last night, he insisted on sticking with “plan B” and said, “we have a chance to ride this Omicron wave without lockdowns”. With the threat of an imminent lockdown removed, the pound managed to add to its recent gains posting fresh 20-month highs against the beleaguered euro and a 2-month high versus the US dollar. Sterling also benefited from the broad risk-on environment that has seen global equity markets continue to post record highs.

Ahead of the UK energy price-cap revision due in February, the breath-taking surge in energy prices continued, prompting PM Johnson to state he would not rule out cutting VAT on fuel bills. With annual household energy bills expected to rise by over 40% from April, even the total abolition of the 5% vat duty will unfortunately hardly make a dent to the huge planned increase.

 

Euro

In this powerful risk-on environment, the single currency once again underperformed its peers with markets choosing to shun the euro in favour of higher-yielding currencies. Comments from the ECB that inflation is close to peaking also added to the euro’s woes. In the absence of any hard EU macro-economic data this week the euro will likely continue to follow broader market themes.

There are no major economic releases scheduled for today.

 

US Dollar

The US dollar had a mixed trading session yesterday, posting a fresh 5 year high versus the risk-averse Japanese Yen, but making fresh 2-month lows against the British pound. With US equities posting yet another record high the generally positive market tone is encouraging traders to sell US dollars in favour of more risky currencies, highlighted by the commodity complex where the Australian, Canadian and New Zealand dollars all continue to record healthy gains.

Given the Fed’s recent surprisingly hawkish U-turn regarding inflation being transitory and expressing the need to quicken the pace of tapering, markets will be focussing on the minutes from the December Federal Reserve meeting set to be released this evening for further detail as to the Fed’s thought processes.

Today’s ADP private payroll report set to be released at 1:15pm will be closely monitored by markets ahead of Friday’s key US monthly employment report.

 

Market rates

Today's Interbank Rates at 07:59am against sterling movement vs yesterday.

Euro €1.197 ↑
US dollar $1.353 ↑
Australian dollar $1.870 ↓
South African rand R21.69 ↑
Japanese yen ¥157.0 ↑