Sterling dropped to fresh year-long lows against the dollar and two-week lows against the EUR on Tuesday as Covid fears and central bank divergence drove the markets. The UK’s count of Omicron cases jumped to 22 yesterday as Boris Johnson announced a return of some pandemic restrictions. In addition, despite the inflation rate spiking in the UK, the Bank of England has remained firmly with the opinion that inflation is transitory whereby the price of food, energy and autos have been affected by supply chain blockages. With markets currently pricing in no rate hike in December’s BoE meeting, Governor Bailey’s speech this afternoon will be carefully monitored. Offering some support to sterling on Tuesday, Bloomberg reported France is preparing to offer Boris Johnson proposals for an agreement with the European Union on migration, less than a week after Emmanuel Macron slammed the UK Premier for not taking the issue seriously enough.
Despite seeing some volatility during Tuesday’s market, the euro opens today on a neutral footing. Speaking last night, European Central Bank Governing Council member Pablo Hernandez de Cos said that the new coronavirus variant and the inflation spike in the euro area were pointing to a significant negative revision to the 2021 growth forecast. European CPI’s released yesterday showed the headline inflation up 4.9% YoY and core inflation up 2.6% YoY, with the ECB continuing to insist the current high rate of inflation will not persist. Meanwhile, unemployment fell in Germany by 0.1% to 5.3% in November. This data was slightly better than expected but Germany’s economy still has some way to go to fully recover as shown by Retail Sales data released this morning – sales dropped 2.3% YoY to -2.9% in October.
The dollar experienced a sharp upsurge of around 1% yesterday following hawkish comments from Fed Chair Jerome Powell. Speaking in front of the US Senate Banking Committee on Tuesday, Powell said it would be appropriate to start accelerating the pace of tapering and also noted that it was time to stop describing inflation in the US as “transitory”. Despite this news, the US dollar staged a correction this morning and the US Dollar Index seems to have steadied around 96.00 with the market still sceptical that growth fears could emerge amid fresh coronavirus concerns. Looking ahead today, US ISM Manufacturing PMI and Fed Chair Jerome Powell’s testimony 2.0 will be looked at for clear direction.
12:00pm GBP BoE’s Governor Bailey speech
13:15pm USD ADP Employment Change (Nov)
15:00pm USD Fed’s Chair Powell testifies
15:00pm USD ISM Manufacturing PME (Nov)