Jamie Jemmeson
January 6, 2022

Sterling Makes a Positive Move as Restrictions are Avoided

The Sterling makes a positive move yesterday following Prime Minister Johnson’s announcement that there’s no plan for tighter COVID-19 restrictions in England. 

Optimism remains elevated surrounding high immunity levels and boosters will continue to help curb the spike in cases for now. This could also provide an advantage over the Eurozone – where lockdowns are happening – and provide the Sterling a footing against the Euro as it trades at near 2-year highs. 

Today’s final reading of the UK services PMI for December is expected to confirm the sharp moderation in activity captured by the ‘flash’ survey estimate last month.

US Dollar Strengthens after Report on Faster Rate Hikes

The US Dollar rallied following the release of the report from the Federal Open Market Committee (FOMC) meeting in December. It shows that policymakers are on board with plans to accelerate the withdrawal of the bond-buying programme – paving the way for faster rate hikes. It also includes the Federal Reserve’s (Fed) plan of reducing its balance sheet following the start of raising interest rates, which may mean that a move could happen afterward. 

According to the dot-plot of the individual projections, officials expect to raise rates three times in 2022, followed by three more hikes in 2023. The overall tone of the report showed that Fed officials are confident that the US economy will recover strongly despite the pandemic. The report also triggered a drop in risk sentiments during the afternoon trading session with equities moving lower. While the 10-year US Treasury bond yield jumped to its strongest level since March.

The focus today will be on the services ISM survey for December, and it’s expected to drop in the monthly reading due to Omicron. Tomorrow, the market will pay close attention to the key job data to help determine the pace of the Fed’s policy tightening programme.

Could the European Central Bank (ECB) Act this Year? 

The Eurozone’s final services PMI index read 53.1, a downward revision from the previous flash reading of 53.3. Both the Spanish and Italian indexes reported below expectations at 55.8 and 53.0 versus the forecasts of 57.3 and 53.9 respectively. On the contrary, the German services PMI read slightly above the forecast at 48.7 versus an expectation of 48.4.  

According to Governing Council member Martins Kazaks, the ECB stands ready to act if the inflation outlook strengthens. And with the gradual phasing out of the European bond-buying programme, markets are currently betting on a 10 basis-point hike by close of play this year and another by March 2023 despite Christine Lagarde’s comments on interest rate hike not happening this year. 

Looking ahead to today, it’s a very quiet day for key European macro-economic data. German factory orders month-on-month (MoM) figures read above the forecast at 3.7% versus the expected 2.1%. The European PPI MoM is also due later this morning and is expected to read at 1.1%.

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