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Sterling Slides on Diminishing Risk Appetite and Disappointing Data

A risk-off mood took hold of the market yesterday which in turn pushed GBPUSD lower, testing the lows for 2022. Sentiment was lower following an escalation of tension between Ukraine and Russia with the West issuing warnings. Russia denies plans to invade Ukraine, despite assembling some 100,000 soldiers. President Biden held a video call with European allies on Monday as Western powers aim for a common strategy against Russia’s actions. The UK has warned Russia of “swift” and “unprecedented” sanctions if an incursion takes place.

In the meantime, the UK PMI manufacturing and service sector indexes were released. Both figures declined to an 11-month in December. The manufacturing output index, however, strengthened to a 5-month high while there was a slight easing of cost pressures. The service sector also painted a positive picture with a strong increase in orders growth for the month but there were strong inflationary pressures with input costs and selling prices both registering the second-highest readings on record which will maintain underlying speculation over Bank of England (BoE) tightening.

It’s a quiet day in terms of economic data with only the CBI survey set for release. This will provide an update on current trends in the manufacturing sector. The consensus forecast is for the total orders index to edge lower in January but to continue to signal relatively strong demand, although supply issues are affecting output volumes. However, the overarching focus will be on the current trends in the form of political uncertainty at home and overseas.

Greenback Rallies on Safe-Haven Flows Ahead of FOMC Meeting

The US Dollar gained support at the start of the week as escalating geopolitical tensions amid the Russia-Ukraine conflict, rising inflation fears and renewed concerns over a global economic outlook continued to weigh on investor sentiment. In wider financial markets, US stocks fell sharply and by as much as 2.50%, while in the currency market, lower-yielding currencies, or traditional safe-haven currencies such as the greenback, Japanese yen, Swiss Franc all strengthened throughout the day. 

Yesterday saw the release of flash Markit PMI data in the US, UK and Europe and provided markets with further insight into the impact of the Omicron variant on economic activity. The US manufacturing index was reported at 55.0 vs. 57.7 in December, while the Services index dropped to 50.9 from 57.6. The Services sector data pointed towards the weakest pace of expansion in the sector since July 2020, on the back of labour shortages and employee absences, both results of the Omicron variant. New business growth slowed to a four-month low, meanwhile employment rose at a modest pace. Finally, yesterday, business confidence fell to a three-month low over inflation concerns. Despite the weaker-than-expected releases the dollar remained well supported amid fears of a global economic slowdown.

Looking ahead to the remainder of this week, the market will review Consumer confidence ahead of the FOMC January meeting and interest rate decisions. The Federal Reserve is widely expected to hold rates at the January meeting, with a focus on the Monetary policy statement and press conference, providing the latest guidance from the central bank policymakers. Thursday will see the release of Q4 GDP data and Durable goods orders, providing investors with updated growth figures in a busy week of releases.

Geopolitical Tensions Weigh on the Euro

To summarise the macro-economic data releases for the Eurozone yesterday, German Flash Manufacturing PMI read above forecast at 60.5 for January versus an expectation of 56.9 and a December reading of 57.4. This demonstrates further expansion in the index and manufacturing sector of Europe’s powerhouse economy. Similarly, the Services Index also surprised to the upside, reporting 52.2 versus an expectation of 47.9 and a December reading of 48.7, again showing expansion within the services sector. Following a similar pattern, the Eurozone Manufacturing Index strengthened to 59.0, exceeding an expectation of 57.6 and expanding from the December reading of 58.0. Conversely, Eurozone Services PMI read below forecast at 51.2 from 53.1 previously because of increased price pressure.

According to a Reuters article, European Central Bank (ECB) member Francois Villeroy de Galhau stated yesterday that the ECB will do whatever is necessary to bring inflation down to around 2%, the central bank’s inflation target. In an interview with Handelsblatt, Finnish central bank chief Olli Rehn commented that the key drivers of inflation within the single bloc will subside over the year and hover around the key 2% inflation target. Currently, market expectations are for a 10 bps hike in Q1 2023.

Finally, geopolitical tensions continue to escalate between Russia and the West along the Ukrainian border with the US reportedly having 8,500 troops on high alert for deployment on short notice. In a video conference with European leaders, US President Joe Biden discussed the possible mobilisation of further US forces to NATO members with an additional 45,000 on standby if required.

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