Sterling gained modestly on Monday, as the market focused on a speech made by Bank of England Deputy Governor Ben Broadbent. He warned that Britain’s tight labour market will add pressure to inflation and stated that it could “comfortably exceed” 5% in April 2022. This, combined with his comments that transitory inflation should be understood as referring to the next 18-24 months, led investors to question whether the central bank might once again be considering a rate hike at December’s meeting. However, the lack of data from the UK this week and fears over the increasing cases of Omicron have capped sterling’s gains.
The euro has weakened slightly on Tuesday’s open with pressure increasing on the common currency, as bets firm on US interest rates rising far before those in Europe. Despite German Industrial Production data released this morning showing a growth of 2.8% in October, the market largely ignored this with eurozone growth expected to be compromised due to covid related restrictions in Germany and other major eurozone countries. Looking ahead, today’s economic docket features the release of the German and Eurozone ZEW Economic Sentiment Index along with the final version of the Eurozone GDP print for the third quarter of 2021, all of which could offer some needed support to the euro.
The dollar has found some support on Tuesday, as treasury yields continued their rise off 10-week lows on Monday. Also helping the dollar’s cause are the persistent hopes that the Fed will raise rates next week and a possible 2nd raise in the first half of next year. Markets are keeping an eye on the new Omicron covid variant which is now being reported to have much milder effects than initially anticipated. This has buoyed hopes that the latest wave of cases will be less deadly than with the previous Delta variant and therefore the US will continue to refrain from lockdowns which brightens prospects for Fed policy movement.
10:00 am EUR Gross Domestic Product s.a. (QoQ)(Q3)
10:00 am EUR ZEW Survey – Economic Sentiment (Dec)
10:00 am GER ZEW Survey – Economic Sentiment (Dec)