Omicron fears continue to drive markets

Lawrence Kaplin
Lawrence Kaplin 06 December 2021

GBP: Three-week low v euro

EUR: Covid restrictions hamper growth

USD: Unemployment hits 21 month low

Sterling

The pound weakened Friday following dovish commentary from BoE hawk Saunders, indicating he might pause in voting for a rate hike at the next MPC meeting due December 16th. Having been one of only two committee members to vote for a rate rise at the November meeting, sterling immediately fell on the news, as markets reduced the probability of a December hike to less than 50%. UK/EU Brexit trade negotiations are set to continue but with the renewed uncertainty following the onset of Omicron, for now at least, both sides seem content to kick the can further down the road.

A very light UK economic calendar scheduled for this week ahead of next weeks’ Bank of England MPC meeting, with Friday’s October GDP release being the highlight.

 

Euro

The single currency continues to attract risk off-flows, rising to its highest levels in three weeks v GBP. Stronger than forecast Eurozone inflation data also added to the general bid for the euro before news of Germany and other European member states increasing their Covid restrictions curtailed the rally.

Final Q3 GDP numbers are due for release Tuesday, and German inflation data Friday.

 

US dollar

The dollar rose last week following Fed Chair Powell’s very hawkish testimony to Congress. By saying “we should retire the word transitory” when referring to inflation, and that the FOMC are open to discussing a quickening of the tapering of its asset purchase programme, markets immediately brought forward their expectations for the first rate hike from August to May next year.

Friday’s US monthly employment report showed a much smaller than forecast gain of 210k workers versus the expected 550k, this initially caused an weakening of the dollar before further details showing the unemployment rate had fallen to a 21-month low of 4.2% saw the move sharply reverse with the dollar hitting its best levels of the week.

With the Fed now under a media blackout ahead of next week’s FOMC meeting, Friday’s US inflation data will be watched extremely closely by the markets.

 

Elsewhere

Omicron news continues to weaken commodity currencies, with the Australian and New Zealand dollar both hitting new lows for the year versus the US dollar. Interest rates are expected to remain unchanged at the Australian and Canadian policy meetings this week due Tuesday and Wednesday respectively.

 

Market rates

Today's Interbank Rates at 07:45am against sterling movement vs yesterday.

Euro €1.173 ↓
US dollar $1.323 ↓
Australian dollar $1.886 ↑
South African rand R21.23 ↑
Japanese yen ¥149.7 ↓

 

Have a great day.