Daily FX 11.01.22: Central bank rhetoric will be crucial for the pound against the euro and the dollar
Central bank rhetoric will be crucial for exchange rates, equity markets also in the spotlight
At this point, the markets still tend to look at Omicron’s short-term developments with a strong underlying focus on interest rate trends in the US and globally.
Developments in China will always be watched closely as authorities respond to outbreaks with very strict restrictions. In this environment, an increase in cases could seriously disrupt the economy, exacerbating global supply problems.
An important element will be the speed of any further correction in the stock markets. Large losses would tend to destabilize risk appetite and trigger substantial exchange rate moves, while gradual losses would be more benign for currencies and support the pound.
British Pound Exchange Rate Outlook
The pound / dollar exchange rate (GBP / USD) failed to break above 1.3600 on Monday, but there were strong buying during the lows, with the pair challenging the 1.3600 area again on Tuesday.
The pound was supported by rising UK yields and hopes the UK Omicron wave was near a peak which would allow the government to avoid further restrictions in England.
Risk conditions will also be important for sterling movements, with sterling also gaining clear support if UK stocks show gains.
GBP / USD should maintain a firm tone in the near term, especially if there is a break above 1.3600.
Euro (EUR) exchange rate today
The euro to dollar exchange rate (EUR / USD) fell ahead of the US opening on Monday, but there were strong buying on dips below 1.1300 as the pair ultimately posted gains net.
There was further speculation that the ECB would have to switch to a less accommodative policy given the sharp rise in inflation which could have significant implications for the euro.
Barclays commented; “We believe the relative resilience of the euro stems from heightened market expectations for ECB policy tightening.”
US Dollar (USD) Exchange Rate Outlook
Although there were strong expectations of a near-term rise in interest rates, the dollar was unable to hold on to its gains on Monday, especially as the 10-year bond yield fell by compared to 22-month highs just above 1.80%.
Expectations of tighter monetary policies on the part of other global central banks also undermined the potential for further dollar purchases.
Barclays still don’t expect the dollar to secure longer term support; “We continue to expect a modest depreciation of the US dollar over 2022, reflecting our vision of a positive environment for risk and commodities, a decline in demand for safe haven, a further limited rise in US rates after last week’s revaluation and a moderate overvaluation of the dollar. “
The Swiss franc lost further ground on Monday as global yield trends dominated.
The exchange rate of the British pound against the franc (GBP / CHF) strengthened to 2-month highs just below the 1.2600 level.
The New Zealand dollar struggled to find support, with the exchange rate between the British pound and the New Zealand dollar (GBP / NZD) posting net gains to a 16-month high just above 2.0100.
The day to come
The Federal Reserve’s rhetoric will remain the main focus on Tuesday, with President Powell scheduled to testify before Congress. Markets will be watching his comments on interest rates closely given growing speculation there will be a rate hike in March.
The dollar will be vulnerable if Powell seeks to downplay the potential for a rate hike in March.
UK coronavirus data will be watched closely given some optimism that UK case rates are about to peak, with overall risk trends also being important.
There will be some caution ahead of Wednesday’s US CPI inflation data.