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Rate Expectations and Open Economy Boost Sterling

The UK services sector PMI was revised higher but remains the lowest for the past 10 months. The latest Bank of England (BoE) survey also indicates that companies expected to increase prices by 5% in the year ahead compared to 4.2% previously. Fortunately, the Sterling recently secured some support from the optimism that further COVID-19 restrictions won’t be implemented. And that the 25-basis point hike is currently priced at 80% for the meeting on 3 February while the bank rate is priced at 1.00% for the one in August.

Looking ahead to today, the December construction PMI may provide further evidence to the ongoing supply-side pressures and any initial impact of Omicron. Although, last month’s data unexpectedly showed activity at a four-month high. 

Greenback Remains Well Supported ahead of Key Jobs Data

The Dollar remained subdued on Thursday following a hawkish report from the Federal Reserve’s (Fed) meeting in December. It also traded in narrow ranges against several major currency pairs. Policymakers commented that the ‘very tight’ labour market may warrant raising rates at a quicker pace in 2022. Today’s release of December non-farm payrolls data will draw attention across financial markets, the labour market report will (as always) be considered as a key economic indicator and condition for the Fed’s tightening pace in 2022.

The ADP National Employment report showed on Wednesday that private US payrolls rallied last month – beating estimates by almost double. Interest will also be given to today’s earnings data as investors look for signs of wage growth accelerating; however, these figures are likely to be distorted by the pandemic and higher headline inflation rates. Economists are now predicting that the Fed will reduce its balance sheet sooner than the two-year lag from the first hike and have left the door open to possible fours rate hikes this year.

The markets will focus today on the US jobs data with expectations of 426k headline figures for new jobs that were added last December. Annual wage inflation data will also be released with the consensus forecast of 4.1% from last year’s.

German Inflation Highest in 30 years

The German CPI month-on-month (MoM) figures showed that consumer prices had increased by 0.5% with year-on-year (YoY) inflation increasing to 5.3% in December. This represents the highest rate for German inflation in 30 years (since June 1992) driven mostly by the soaring energy costs and previous VAT cuts.

German factory orders read above expectations with a reading of 3.7% versus the expected 2.1% and a previous negative reading of 5.8%, providing a positive indicator for future manufacturing activities in Germany.

Looking ahead to today, the German industrial production MoM figures have already shown a decline of -0.2% versus the forecast of a 1.1% increase in the reading. The German trade balance which shows the difference between imported and exported goods also read under the forecast at 10.9 bn versus an expected reading of 12.7 bn. We also have the European CPI flash and core estimates which are forecasted to read at 4.8% and 2.5% respectively. Finally, the European retail sales MoM figures are expected to show a decline of -0.4% this afternoon.

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