News & Analysis


Sterling enjoyed a sustained rally against the dollar yesterday as Gilt yields followed Treasuries higher throughout the session. Meanwhile, news that the government wouldn’t impose further restrictions to fight the steep rise in Omicron cases meant optimism around the pound wasn’t restrained. Gains against the euro were larger due to the single currency’s struggles against the dollar yesterday, with GBPEUR rising nearly half a percentage point open-to-close. The pound’s rally against the euro resulted in the GBPEUR pair hitting a new pandemic high, however, the rally has faded somewhat this morning. Today, there is little on the data calendar for the UK. The focus of most traders in the market is likely to rest on the release of December’s FOMC meeting minutes at 19:00 GMT, especially as bond markets continue to drive FX price action.


A stronger US dollar due to moves in the Treasury market kept EURUSD below recent levels despite positive data from German employment and retail sales yesterday. German jobless claims fell by more than expected in December as they dropped by 23,000 compared to 34,000 in November while the unemployment rate fell from 5.3% to 5.2%. The number of unemployed in Germany still stands 102,000 higher than pre-crisis levels, but the data does show a continued recovery from the Covid-19 crisis. The impact on the euro may have been more absent given uncertainties around the outlook, as visible by the triple increase in the number of kurzarbeit registrations, a form of government support to avoid layoffs in crises. Germany loosened travel restrictions for people arriving from the UK and South Africa despite new daily cases in Germany almost doubling yesterday, which goes to show that concerns around Omicron are fading as the variant appears to be less severe than Delta. This morning, the single currency has caught a bid against the dollar despite PMI data for December out of Spain showing a continued slowdown in growth due to the impact of the variant. However, a more muted Treasury market and better risk backdrop has overpowered the PMI data and resulted in the euro bouncing back this morning.


The US dollar rallied in yesterday’s session following surging US Treasury bond yields on Tuesday but retraced some of its gains after mixed Omicron headlines and ahead of tonight’s release of the FOMC meeting minutes. The number of daily Covid cases in the US reached new all-time highs on Tuesday, but hospitalisations remain better manageable than the Delta variant. The Fed’s December meeting minutes will be this week’s key event along with Friday’s payroll data after the Fed’s latest dot plot signalled three rate hikes in 2022. Focus for the release will be on the balance of risks, as Fed Chair Jerome Powell was fairly more cautious in the press conference that followed after the release of the projections. Minneapolis Federal Reserve Bank President Neel Kashkari, one of the more dovish members at the Fed, stated on Tuesday he expects the Fed to need to raise interest rates two times this year, reversing his long-held view that rates will need to stay at current levels until at least 2024. Along with the balance of risks, tonight’s release could give markets additional detail on what conditions need to be met for the Fed to start raising interest rates.


Price action in USDCAD was predominantly driven by USD dynamics in yesterday’s session, although a random $0.7 rally in WTI in the afternoon of the European session did help petro-currencies make further inroads against the dollar. The main news yesterday for the Canadian dollar was the OPEC+ decision, which saw a further 400,000 barrels per day come back online as the cartel continues their programme to gradually increase monthly output quotas heading into February. However, despite the commitment to increase production, doubt remains over whether they can fulfil their quota as some members have already begun to fall short. Oil analysts argue that this supports spot crude prices above the $70 mark despite a clouded demand outlook and a commitment on the supply side to increase production. Today, the data calendar is light for the loonie with just building permits data for November released. Focus is likely to remain on USD dynamics, especially pricing in the US bond market, as FOMC meeting minutes are released this evening.



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