GBP

Sterling recovered some ground against the dollar but is under pressure against the euro in early trading. The pound has suffered against the single currency as markets fear the Omicron virus could delay any monetary policy tightening by the Bank of England. Sterling had been in demand against the Euro as markets had priced in a rate hike cycle by the central bank, while the European Central Bank were expected to be less aggressive. A quarterly survey by the Confederation of British Industry (CBI) released this morning for the UK’s service sector, showed the quickest growth in costs for both business and consumer service companies since the survey begun in 1998. Separate data from Lloyd’s bank showed a record 50% of businesses plan to raise prices and a quarter expect to raise pay by 3% or more over the next 12 months.

EUR

The euro remains in demand against its major peers as the Omicron virus has forced traders to reassess whether the European Central Bank will have such divergent monetary policies with other central banks over the coming year. The single currency lost ground over the last few months as a host of ECB policymakers continued to reiterate that they expected the spike in inflation in the European Union to be temporary, dampening expectations that the ECB would raise interest rates and in turn making the euro less attractive than the dollar and sterling. Now that the variant has brought doubt to whether other central banks will tighten policy, the euro has found favour among investors. Inflation data for the bloc in the form of the consumer price index is due for release today.

USD

The dollar initially gained strength in the American trading session on Monday but the sharp decline in US Treasury bond yields caused the currency to drop back in the latter hours. The benchmark 10-year Treasury bond yield is currently down 2% on the day at 1.46%, close to its 3-week lows of 1.45%. The rise in worldwide cases of Omicron has put pressure on the greenback due to its risk to growth in the American economy and therefore pushing back bets for Fed tightening. However, in a prepared testimony for Congress later today, Fed Chair Jerome Powell is expected to say that Omicron could cause inflation pressures to last longer – this could maintain the need for rate hikes. Elsewhere, President Biden offered welcome respite when he said the country would not go back to lockdowns to stop the spread of Omicron, and he would lay out his strategy on Thursday for combating the pandemic over the winter. Today’s release of Consumer Confidence could offer further support to Treasury yields and the dollar.

Economic Calendar

10.00 EUR Consumer price index
10.30 EUR Bundesbank President Jens Weidman speech
14.45 US Chicago purchasing manager’s index
15.00 US Fed Chairman Powell speech