The pound has managed to hold on to yesterday’s gains in early trading. Sterling was buoyed by comments from Prime Minister Johnson who said on Tuesday that England could withstand a surge in covid infections without shutting down the economy, even though the UK reported another record daily-high in cases. Johnson said he was sticking to the “Plan B” measures introduced in England last month, which included the wearing of face coverings on public transport and in shops but did not restrict gatherings or close businesses. Manufacturing data also helped the pounds cause as the PMI index rose past the expected forecast of 57.6 to 57.9 in December. Sterling has impressively risen over 2% against the dollar and gained 2 cents against the euro in the past 2 weeks as traders believe the surge in Omicron cases will not deter the Bank of England’s rate hike cycle in 2022.
The euro continues to fluctuate in a relatively tight range against the dollar in early trading. After closing the first two days of the week in negative territory, EUR/USD seems have settled around the key technical level of 1.1300 for now, but the shared currency looks increasingly unlikely to outperform the greenback in a convincing manner due to the divergent central bank policies.
After two days of consecutive gains, supported by US treasury yields, the dollar index gave away some of its gains in early trading. The yields on US 5-year treasury notes which are sensitive to rate hike expectations and reflect the markets view on interest rates, reached the highest level since February 2020 yesterday and the CME futures market is now pricing in a 60% chance that the central bank’s first rate hike could come as early as March. With this in mind, traders main focus of attention today will be the release of minutes from the Federal Reserve Bank’s December meeting. However, prior to the minutes, this afternoon’s ADP employment report for the private sector may dictate the greenbacks moves today.
1.30 pm US ADP employment report
7.00 pm US Federal Reserve Bank minutes