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Positive News Show Growth Topping Pre-Omicron Data

Positive news about the UK economy show growth that surpasses its pre-pandemic size in November since the COVID-19 outbreak. Gross domestic product rose by 0.9% in October when it gained 0.2%. The output was 0.7% above its level in February 2020 before the pandemic started. However, with the introduction of restrictions due to Omicron, it’s likely that softer numbers will be seen in December and January.

There have been further blows to Prime Minister Johnson this morning as reports suggest that letters have been submitted to the 1922 committee stating “no confidence” in his leadership. Ongoing Investigations also suggest two further lockdown parties took place at 10 Downing Street. He’ll also quarantine for a week due to the members of his family testing positive for COVID-19.   

The Sterling was hindered to some extent by concerns over a squeeze on real incomes, given the impact of higher energy prices with a huge increase in household energy bills scheduled to come into effect on 1 April.

Looking to the day ahead, it’s quiet on the data front but the market will keep a close eye on domestic political developments.

Dollar Weakens on Monetary Policy Outlook

The US Dollar continued to weaken against major currencies on Thursday following the release of December’s Producer Price Index. The annual reading for December was slightly below market expectations and the greenback remained under pressure as the US Dollar index fell to a 2-month low. With the recent US inflation data being in line with the consensus forecasts, investors have loosened their hawkish bets of four rate hikes this year.

Economists and traders have also continued to speculate whether the Federal Reserve (Fed) will hike rates three or four times this year following the report in December and Jerome Powell’s testimony before the Congress earlier this week.

Looking ahead to today, markets will review the release of December’s retail sales data and industrial production figures for the updated economic projections. COVID-19 implications are likely to have had an impact on the consumer spending rate, but the markets expect a rise of 0.4%. Elsewhere, the University of Michigan’s Consumer Sentiment Index for January is expected to reflect a downtick in consumer confidence.

The Fed’s New York President, John Williams is also scheduled to speak later in the afternoon and investors will look to any guidance over monetary policy ahead of the next Federal Open Market Committee (FOMC) meeting on 25 January.

Euro Confined to Narrow Trading Ranges

As discussed in yesterday’s Euro section, there was little in the way of key data releases to provide significant direction for the Euro with the main pairs mostly confined to narrow trading ranges. The European Central Bank’s (ECB) latest economic bulletin provided some analysis on current and future economic conditions by summarising that Omicron is likely to create further uncertainty in global growth with supply-chain issues, the rising price of commodities, and increasing Omicron infections weighing on near-term global growth prospects. However, it did comment that the Euro area is moderating and is expected to pick up strongly in 2022. We saw little reaction from the Euro following the release of the bulletin.

Looking ahead to today, we have the release of the German full-year (2021) GDP figures which are expected to show a 2.5% increase. The assumption is that Q4 GDP will contract because of the increased lockdown measures imposed during that time. ECB President Christine Lagarde is due to speak this morning at the Conference of Parliamentary Committees for Union Affairs. 

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