Matthew McClure
January 5, 2022

Sterling Pushes Close to 1.20 against Euro

GBP

Sterling has continued its trajectory this week reaching close to 1.20 against the Euro, at 1.1993 during yesterday’s trading session, and back up to 1.355 against the US Dollar, improving on the 1.31 lows of late December. Sterling has been on the rise as risk sentiment seems to be shifting in the currency’s favour, with plenty of countries implementing restrictions in Europe over fears of the Omicron coronavirus variant while the UK has stood firm.

Daily infections of Omicron hit a record high of 218,000 yesterday which is a 58% increase on last week’s numbers, but UK Prime Minister, Boris Johnson, has said the country has the opportunity to ‘ride out’ this wave of coronavirus as this variant has proven to be much milder than others, as evidenced by no surge in mortality rates, as well as the vaccine booster offering 88% protection against hospitalisation. Yesterday, he said “Thanks to the fantastic national effort to get Britain boosted, we now have a substantial level of protection… And so, together with the Plan B measures that we introduced before Christmas, we have a chance to ride out this Omicron wave without shutting down our country once again.”

Sterling has benefitted off the back of this news, but Omicron has undoubtedly had an effect on the economy during this time, with people choosing to be cautious when leaving the house and spending with such uncertainty. The Bank of England, however, are expected to continue to raise interest rates in 2022 to battle their expected inflation levels of over 6%. The next interest rate decision is on 3rd February where there are rumours rates will rise again by 0.5% this time, and a further 0.25% in summer to bring the rate to 1% in the UK.

Looking forward on a smaller scale, there are no major economic data releases until the end of next week where we will see the month-on-month GDP, Industrial and Manufacturing figures.

EUR

The Euro has been struggling to battle against the Pound with trading levels continuing to drop towards the 0.83 level but has seemed stable against the US Dollar as rates hover around 1.13. The reaction to the Omicron variant has been central to the currency’s performance, with plenty of member countries including France, Germany, Italy, and the Netherlands all imposing strict measures to offset the coronavirus.

As the New Year begins and more news is released regarding the mildness of the new variant, we can expect these members to open up the economy again and bounce back. Yesterday saw Germany’s Retails Sales and Unemployment data released, both of which came in with better-than-expected results. The Labour Office said the number of people out of work fell by 23,000, with the consensus among analysts a figure around 15,000. The jobless rate fell to 5.2%, the lowest since

March 2020, but Detlef Scheele, the head of the Labour Office for Germany, has warned of renewed restrictions as a result of more coronavirus cases. Companies in Germany signalled use of the Kurzarbeit, the country’s own furlough scheme, heading into the end of the previous year, so these figures may be short-lived. As one of the main powerhouses in the continent, this data will help the bloc recover at least temporarily, however, and hopefully provide some strength for the euro.

It will be a busy end to the week for the continent as year-on-year Consumer Price Index and Retail Sales figures are both released this Friday. These are key market movers as CPI can be used as a measure for inflation, and the retails sales will measure the performance of consumer spending.

USD

The US Dollar was the top-performing currency in the world in 2021, in a year full of uncertainty and low risk sentiment meaning more investors flocked to the Dollar’s safe haven reputation. This year has started strong in some respects, only falling slightly to GBP. USDGBP currently sits at 0.738 after starting the week above 0.744, and USDEUR has remained in the mid-0.88s, currently at 0.8844 at the time of writing.

Yesterday saw the Institute for Supply Management release the US Manufacturing Purchasing Manager Index figures at a lower-than-expected rate, with the consensus among analysts forecasting a rate of 60 and the actual rate coming in at 58.7. Although any figure above 50 means the business activity has expanded during the survey period, the release underwhelmed with what was forecasted, as well as two other data releases from the ISM, so some weakness for US Dollar can be expected.

The FOMC (Federal Open Market Committee) will release the minutes of the Federal Reserve meeting 3 weeks ago, and this is key for any prediction for the Fed’s outlook for future policy decisions, such as interest rate hikes. The Bank of England have started their course of interest rate hikes with the first increase in December, and the US is expected to follow suit with their own hikes in 2022. Any bullish indication from this report will provide strength to the Dollar

As mentioned in yesterday’s report, this week will be a busy one for the US in terms of economic data as there are plenty of major releases to kick off the New Year. Today sees the ADP Employment Change, measuring the change in the number of employed people in the US, for December which is predicted to be significantly less than November’s impressive figures. Tomorrow the ISM will release the Services PMI data to measure the non-manufacturing sector’s performance, and Friday has the most important release of the month for anyone looking for volatility or a positive outlook on the USD in the Non-Farm Payroll data, the release for how many jobs were created in non-agricultural industries.

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