Jamie Jemmeson
January 5, 2022

Sterling Rallies Despite New Highs in Omicron Cases

Yesterday the Sterling pushed higher against the US Dollar and the Euro due to weaker US data and the continuation of Plan B. It increased to a fresh 22 month high against the Euro as the diverging path of interest rates between the two economies continues.

Meanwhile, UK mortgage approvals edged lower as net consumer borrowing increased resulting in a muted response. The final manufacturing PMI was revised slightly higher to 57.9 from the flash reading of 57.6, highlighting that the sector expanded more than expected.

New COVID-19 cases also exceeded 200k for the first time yesterday. PM Johnson said there’s a “good chance” no further restrictions will need to be imposed in England despite soaring Omicron cases.

Factory Orders Fall in December Hitting an 11-Month Low

The ISM’s manufacturing PMI data released yesterday showed a drop in factory orders from 61.1 in November to 58.7 in December – a reading below the consensus forecast of 60.0. It’s an 11-month low for the sector amid a slowdown in new orders. Elsewhere, US job openings fell slightly but remained close to record levels. The number of job openings also fell to 10.562 m, falling short of the expected 11.075 m. The softer than expected data weighed in on the US Dollar later in the trading session.

Today, the markets’ focus turns to the release of the Federal Reserve’s (Fed) report from the meeting in December for updated guidance on monetary policy. The meeting was particularly hawkish in nature with economists currently pricing in more than 60% chance of a Fed rate hike in March. Fed Chair Jerome Powell has recently signalled an end to the pandemic tapering programme in March with three quarter-point rates hikes signalled in 2022.

The ADP jobs report is also set to release ahead of key non-farm payroll data on Friday. The labour market, along with headline inflation has been cited as important conditions for Fed policymakers in determining the pace of reducing the monthly bond-buying programme and rate hikes this year.

Eurozone Inflation Closes to its Peak

German retail sales read above the forecast yesterday increasing by 0.6% in November versus an expectation of -0.2%, although, the Euro remains unaffected by it. German unemployment fell by 23k for December following a 34k decline in November. Elsewhere, Spanish unemployment declined by 76,800 after a 74,400 fall in November.

Francois Villeroy de Galhau, Head of the Bank of France and European Central Bank’s (ECB) governing council member, commented that the surge in Eurozone inflation is close to its peak. A report published last month on French consumer prices showed initial signs of prices beginning to stabilise. He also added that supply difficulties and energy pressures should slowly subside over the course of 2022.

The recent surge in inflation also keeps the ECB policymakers unsure whether to follow their central bank counterparts and hike interest rates. And so, any redress in inflation should cause a change in the ECB’s near-term policy adjustments.

Looking ahead to today, we have a plethora of final services PMI data for Spain, Italy, France, and Germany. The final readings for the Eurozone in December are expected to show a sharp decline from 55.9 to 53.3, demonstrating expansion within the bloc at its slowest pace since April.

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