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Comments Surrounding Inflation Give the Sterling a Boost

Sterling received a slight boost yesterday despite a quiet day for economic data. The market was focused on the comments given by the Bank of England’s (BoE) Deputy Governor, Broadbent, stating that he feels inflation will exceed 5% in April as the labour market inflation remains persistent. When asked if the Omicron variant would affect his vote on interest rates next week, he remains undecided and said that his decision would not be driven by a single factor. Additionally, some members of the BoE have now started their Purdah period ahead of next week’s monetary policy updates.

Overnight, the British Retail Consortium’s (BRC) sales measure was 1.7% higher than last year on a like-for-like basis. It is very quiet in terms of economic data today as the markets are likely to focus on the developments of Omicron.

Global Uncertainty Continues to Support the US Dollar

The risk story associated with Omicron will be the focus and driver for the US Dollar this week. The uncertainties surrounding the variant and its economic impacts continue to increase volatility in the financial market. Global equities, oil prices, and US Treasury yields remain on the back foot. However, short-term yields have fallen by less than indicated, and that the Federal Reserve (Fed) could still quicken the pace of its tapering process, paving the way for a potential interest rate rise next year. The current taper pace is $15 bn per month with the current bond-buying programme at $105 bn.

Elsewhere, China’s stocks rose sharply yesterday as Beijing tried to ease the Evergrande turmoil over growing concerns of a possible default with the world’s most indebted developer, which has been impacting Asian stock.  

It was a slow start to the week in terms of economic data releases yesterday and today’s calendar remains light with no Fed speakers scheduled ahead of the Federal Open Market Committee (FOMC) meeting next week.

ZEW Index to Give Early Indication of Economic Activity

Yesterday represented a very quiet day for key Eurozone data releases. The German factory orders surprised significantly to the downside falling by -6.9% versus an expected reading of -0.2% and +1.8% reading previously. The Italian retail’s month-on-month (MoM) sales figures also read below forecast at 0.1% versus 1.0% previously.

Looking ahead to today, the German ZEW Sentiment index will provide us with an early update of economic activity in December. The expectation is for the index to read lower than November’s at 25.3 versus a previous figure of 31.7. The recent increase in COVID-19 cases along with the emergence of the Omicron variant could see European sentiment erode further.

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