January 7, 2022

“The dollar is on course to level weekly gains and further improvements are expected if U.S. labour data reinforces the case for early Federal Reserve interest rate hikes.”

Sam Cornford, Partner and Head of Trading

Main headlines

With the economy healing, but price gains pinching consumers, officials are dialling back bond purchases and getting in position to raise interest rates. Federal Reserve policymakers moved into inflation-fighting mode on Wednesday, saying they would cut back more quickly on their pandemic-era stimulus at a moment of rising prices and strong economic growth, capping a challenging year with a policy shift that could usher in higher interest rates in 2022. A fresh set of economic projections released on Wednesday showed that officials expect to raise interest rates, which are now set near-zero, three times next year.

Conservative MPs told the prime minister that expanding existing support schemes would not be enough to help consumers hit by significant price hikes, as Downing Street ruled out delaying a tax rise this April. The chancellor, Rishi Sunak, said on Thursday that the Treasury was examining ways of mitigating the impact of soaring energy prices on consumers when the price cap is reviewed in February. The boss of one of the UK’s fastest-growing energy suppliers has said Britain must find £20bn to rein in soaring household bills that have compounded fears about a cost-of-living crisis in 2022.

GBP

Sterling is well bid against most major currencies overnight. A record number of companies are planning to raise prices because of supply chain disruptions and increased raw material and energy costs, a closely watched survey has revealed. The British Chambers of Commerce (BCC) said there was already strong evidence of an economic slowdown in the final quarter of 2021 before the Bank of England raised interest rates in December to combat rising inflation expectations. New Covid-19 restrictions announced by the prime minister to tackle the Omicron variant are unlikely to derail the economy, but they could trigger a pingdemic costing at least £2 billion.

EUR

Euro is stronger against the dollar and weaker against sterling this morning. Russia is trying to bypass the European Union by holding talks directly with the United States over Ukraine, where Moscow has moved nearly 100,000 troops close to its border with its neighbour, France’s foreign minister said on Friday. German factory output is seen increasing 1% month on month, while France should see a 0.5% uptick. The euro-area’s headline inflation rate may have slowed to 4.8% in December, while the core CPI is estimated at 2.5%. European banking stocks benefitted from a sharp rise in borrowing costs on Thursday after minutes of a December Fed meeting released on Wednesday showed officials might be keen to raise interest rates sooner than expected.

USD

The dollar is weaker than most major currencies in early morning trade. U.S. employment growth likely picked up in December, culminating in record job creation in 2021, but the labour market could temporarily lose its lustre as raging COVID-19 infections cause disruptions at businesses and schools. Biden used the first anniversary of the January 6th assault on the U.S. Capitol on Thursday to urge Americans to protect the country’s fragile democracy by standing up for the right to vote.

Markets

U.S. equity-index futures declined, and European stocks opened lower as investors bet Friday’s U.S. jobs data would do little to change the Federal Reserve’s path toward faster-than-expected tightening. March contracts on the technology-heavy Nasdaq 100 Index fell 0.4%, while S&P 500 futures lost 0.1%. Europe’s Stoxx 600 gauge slid for a second day, set for the worst week since November. Treasuries were steady, with the two-year yield heading for the biggest weekly spike since October 2019. A weaker dollar and gains for emerging-market stocks signalled some risk-taking had returned after the turbulence earlier in the week. With Fed officials preparing for aggressive rate hikes and a contraction of the central bank’s balance sheet, markets expect little chance of a change of heart even if Friday’s figures come in below expectations.

Main Economic Data/ Central Banks/ Government (All Times CET)

8:00 a.m.: Germany Nov. industrial output, trade balance
8:00 a.m.: Norway Nov. industrial output, credit indicator growth
8:45 a.m.: France Nov. industrial production, trade balance
10:00 a.m.: Italy 3Q deficit to GDP
10:30 a.m.: U.K. Dec. construction PMI
11:00 a.m.: Euro-area Dec. consumer confidence, CPI; Nov. retail sales
12:00 p.m.: U.K. to sell bills
2:30 p.m.: U.S. Dec. employment report
5:00 p.m.: BOE’s Catherine Mann speaks
7:00 p.m.: Baker Hughes U.S. rig count

Corporate Events

Earnings include Welcia, Acuity Brands

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