News & Analysis


After what was a fairly constructive week for the pound last week, the currency is back under pressure this morning with traders pushing GBPUSD back into its previous trading range where year-to-date lows were recorded. The pressure is largely stemming from the UK’s health backdrop, which over the weekend stabilised in terms of the number of cases, albeit at high levels. Numerous high-level politicians have spoken out about the threat the latest spike in cases poses and haven’t ruled out tightening lockdown conditions further in order to stem the outbreak. Rumours of an imminent lockdown are circulating the press, following suit with the Netherlands who announced a lockdown until mid-January over the weekend, while a short circuit breaker style lockdown after Christmas is also on the table. Focus today will remain on Downing Street and Health Minister Sajid Javid in particular as the data calendar is light and the health backdrop remains the primary GBP driver. Thus far, with GBPUSD trading 0.17% lower on the day, markets are only pricing in a slight tightening of conditions in our view, however, any official announcement is likely to have an outsized market impact as liquidity conditions start to thin out the closer we get to the Christmas period. Elsewhere, Boris Johnson remains under pressure, but this time from Government ministers as the Brexit Minister Lord David Frost resigned over the weekend citing concerns over the “direction of travel” of the current government. Replacing Frost is Foreign Secretary Liz Truss.


As safe havens advanced amid growing virus uncertainties, the euro is trading lower against the US dollar and Japanese yen this morning but is rallying significantly against more procyclical currencies such as SEK, NOK and the antipodeans. The decision of the Dutch government to enter a full lockdown hasn’t isolated losses around the euro so far, which indicates global worries are prominent. At the same time, prospects of freezing weather in Europe sent energy prices flying at a time where supply is limited. Temperatures are set to fall below zero degrees Celsius in several eurozone countries, further straining already disrupted electricity grids. Meanwhile, Russia capped natural gas flows to Germany over the weekend, further adding pressure to prices. Soaring energy prices have weighed on the euro previously as it intensified fears over inflation and could weigh on EURUSD this week as well, especially as risk sentiment remains weak. On the monetary front, Germany named Joachim Nagel as the new Head of Bundesbank to replace Jens Weidmann who announced recently he would step down by year-end. Nagel’s views on monetary policy are despite his 17-year career at the Bundesbank little known to markets as his experience mostly consisted of supervising capital markets. The Bundesbank has historically been uncomfortable with the European Central Bank’s vast amounts of bond-buying as this could stoke inflationary pressures, and the appointment comes at a time where inflation is running high above target, which means markets will closely watch Nagel’s first steps to gauge his views on the inflation outlook.


The dollar starts this week bid across most G10 pairs as risk-off conditions dominate yet again amid concerns over economically damaging containment conditions being rolled out in response to the rise in cases brought about by the Omicron variant. The dollar’s strength comes after a week in which fiscal and monetary support has been pulled from the US economy, leading Goldman Sachs to downgrade Q1 growth from 3% to 2% in annualised terms. While the monetary withdrawal is largely known to markets following the Fed’s commitment to speeding up the tapering process and signalling three rate hikes in 2022 at last week’s meeting, the latest development has been on the fiscal front. The US was always going to enter a fiscal cliff in 2022 as policy is withdrawn as the recovery matures, however, markets weren’t expecting President Biden’s $1.75trn economic plan to go up in smoke over the weekend due to opposition from within the Democratic party. Over the weekend, Senator Joe Manchin announced his opposition to the tax-and-spending package after months of courtship by President Biden to win his vote. Losing support from Manchin is critical in a Senate which is divided equally between Republicans and Democrats until the 2022 midterms, meaning without concessions to Manchin, the additional fiscal stimulus is unlikely to make it to the economy next year.


The Canadian dollar fell down below one-year lows against the US dollar this morning as crude oil extended declines amid increased virus concerns. This weighed on the loonie while at the same time, the greenback found support in the risk-off market mood. Given the empty data docket today and for the most part of the week, focus for the Canadian dollar remains on broader risk flows.



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