While a stronger dollar across the board meant sterling moved back from recent highs in the GBPUSD pairing, the pound continued to hover around March 2020 highs against the euro in yesterday’s session as the single currency underperformed more broadly. Meanwhile, domestic headlines did little for the pound yesterday, with Covid cases in the UK continuing to rise at an unprecedented pace. Later today, Prime Minister Boris Johnson is expected to deliver an update on restrictions after assessing the latest virus data. The British government refrained from imposing new restrictions before the new year, however widespread Covid-related staff absences are weighing on economic activity, especially the service sector. Over the weekend, Johnson instructed ministers to come up with contingency plans for workplace absences as it emerged that the government is concerned about the rapid surges in case counts and the effects that could have on businesses in the coming weeks. Depending on the severity of today’s announcement by Johnson, investors may reassess the negative impact Omicron has on the British economy and reconsider their pricing of further rate hikes by the Bank of England. This could cap gains in sterling throughout today’s session, but if the announcement is mostly centred around subsidies and government support throughout the latest wave and stays clear of new restrictions, sterling upside may be witnessed.
The euro underperformed in yesterday’s session and was trading in the red against most G10 currencies, with EURUSD falling the most in an intraday session since December 17. Covid cases continue to rise all over Europe, while German Purchasing Managers’ Index figures slightly underperformed yesterday, however, the fall in the euro can most likely be attributed to jumps in the US 2Y and 10Y yield more so than domestic headlines given the euro’s sensitivity to yield differentials. For the same reason, JPY dropped to a 4-year low against the US dollar in yesterday’s session. Today’s calendar included stronger-than-expected November retail sales from Germany, with the MoM figure printing at 0.6% vs a negative 0.3%, while French CPI printed closer to the consensus at 0.2% MoM. The calendar is light for the remainder of the day, shifting focus back to developments in US Treasuries.
Yesterday marked the worst start to a year in US Treasuries since 2009 as prices plummeted and the 2-year yield rose to its highest level since the onset of the pandemic. Expectations of Fed hiking is keeping Treasuries offered despite the US setting a new global of 1 million daily recorded cases. Concerns over Omicron have largely abated in markets, as evidenced by price action in Treasuries, as the economic repercussions have seemingly been limited thus far. Holiday distortions have likely resulted in the daily number of new cases in the US being underreported as well, with a clearer picture of the US health backdrop to become visible over the course of the week. Overall, the US dollar firmed on these dynamics, reversing losses seen at year-end. Today, ISM data for December is set for release at 15:00 GMT and should show manufacturing input prices beginning to moderate towards year-end, but the data is likely to be of little influence at the start of the year as market liquidity comes back online. On the data front, payrolls data for December on Friday will likely be the more deterministic release, while economists and rates traders will scour Wednesday’s release of December’s FOMC meeting minutes for further clues on the Fed’s imminent hiking cycle.
The Canadian dollar failed to escape the broader USD strength in yesterday’s session, but is still trading well above December’s average with crude oil prices trading around the top of December’s range. Today’s OPEC+ meeting will be crucial to watch for commodity watchers and CAD traders, especially in light of the damaged pipeline situation in Libya. Markets expect the cartel to stick to existing policy in today’s meeting, which means output is set to be hiked by another 400,000 barrels a day from the start of February. Four sources speaking to Reuters confirmed this and stated concerns around Omicron are easing and that the cartel remains confident of the appropriateness of further output hikes.