Jamie Jemmeson
November 23, 2021

Sterling Slides on COVID-19 Restrictions Fears

The Sterling remains on the backfoot despite being a relatively quiet day in terms of economic data. The move (in large) was due to risk aversion amidst the speculation that the UK would also have to impose restrictions to curb infections. This was further compounded by some of the harsher measures that are being taken in Europe but pose the stark reality that the impact of the pandemic is likely to be felt by the economy for some time moving forward.  

Looking ahead to the day, the latest UK business confidence data will be watched closely with expectations that the Purchasing Managers’ Index (PMI) readings could recede. In November, the manufacturing and services PMIs will provide timely readings on economic trends. In the UK, last month’s readings saw unexpected improvements. The services measure posted a particularly big rise with the removal of some restrictions on international travel highlighted as one reason for the bounce. However, as these are based on month-on-month (MoM) readings, it is expected that these will weaken. The Bank of England (BoE) will be monitoring employment, costs, and pricing indices closely within the data. 

US Dollar Remains Supported as Biden Nominates Powell for a Second Term

The US Dollar remained well supported against several major currencies yesterday following Joe Biden’s announcement to nominate the current Federal Reserve (Fed) Chair, Jerome Powell for a second term. Lael Brainard was considered as the alternative for the main role but was selected as the vice-chair, replacing Richard Clarida. The announcement to re-elect Powell saw US equities fall and the 10-year US Treasury yields increased above 1.6%, while the dollar index remained supported above 96.50. Powell is expected to maintain a hawkish approach towards monetary policy heading into 2022 in response to rising inflation rates in the US.

Fed member Christopher Waller commented on Friday that the pace of the Fed’s tapering of its bond-buying programme may accelerate from $15 billion per month to $30 billion in December. This would pave the way for earlier US rate hikes in 2022. The US Dollar hit a new 1-year high against the Euro on Monday and continued to strengthen against the Australian Dollar.

Looking ahead to today, markets will review the preliminary Markit Manufacturing and Services PMI surveys for November from the US, UK, and EU.

Restrictions Continue to Impact the Single Currency  

The Euro was weighed down by concerns surrounding COVID-19 developments with unease surrounding the latest imposition of restrictions and fears that further measures would need to be introduced over the next few weeks. In this environment, there are further concerns that the economic recovery would be compromised. Lockdowns are already taking place and the introduction into compulsory vaccination is being passed and discussed by regions. It is no surprise that as a by-product, Eurozone’s consumer confidence dipped to -6.8 in November from -4.8 previously and below market expectations of -5.5. 

Inflation rhetoric could have provided the currency a lift had the COVID-19 backdrop not been present. The Deutsche Bundesbank stated that inflation is likely to be just below 6% for November and the economic recovery is likely to take a breather. European Central Bank (ECB)council member Kazaks stated that the Bank can look through transitory price pressures but would need to act if supply shocks put upward pressure on wages. 

The market will watch the PMI manufacturing and services data today for signs of economic activity but will be mindful of the pending restriction and their impact on growth. 

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