Higher US yields to dominate the pound against the euro and the dollar
Higher US Yields Dominate FX Markets, Players Desperate To Make The Right Calls
Central bank expectations and yield trends will be an important factor in the near term, although markets will not be able to ignore Omicron’s developments.
While growth trends are cause for concern, the focus will also be on inflation trends, especially given the enormous volatility in energy prices. Omicron’s influence is complicated by the threat of further supply-side disruptions that will increase inflationary pressures.
Statements from the central bank in early 2022 will be a key element in assessing whether they attempt to examine Omicron’s developments and push forward with tightening plans.
Volatility should remain high, especially with strong pressure on institutions to make the right decisions at the start of the year.
British Pound Exchange Rate Outlook
Position adjustment has been a key market development over the holiday season, especially with low volumes in global stock markets.
The pound sterling (GBP / USD) exchange rate hit 7-week highs above 1.3530 on December 31 before falling back below 1.3500 as the US dollar gained ground.
The dollar’s trends will be important in the near term, with markets also trying to discern likely economic trends in the UK, US and around the world during this year.
Short coverage has the potential to support the pound, particularly with an element of optimism that high immunity rates will keep serious illness at bay.
A firm appetite for risk would support the pound in the near term, but GBP / USD is still likely to sell above 1.3500 unless the dollar manages to advance.
Euro (EUR) exchange rate today
The euro / dollar exchange rate (EUR / USD) posted net gains at the end of the year, peaking at 1.1380 on December 31, before falling sharply below 1.1300.
European politicians and central bankers celebrated 20 years since the introduction of the single currency.
The euro has been supported to some extent by a fall in European gas prices from record levels, but yield trends remain negative for the single currency.
If the equity markets maintain a firm tone, the euro will struggle to advance.
US Dollar (USD) Exchange Rate Outlook
US bond yields have been a key development over the past few days. The 2 year yield is at its highest level since March 2020 and the 10 year yield is at 5 week highs around 1.63%.
There has been other strong speculation that the Federal Reserve will act quickly to raise interest rates in 2022, which has boosted yields and supported the US dollar.
The dollar to yen exchange rate (USD / JPY) hit 5-year highs just above 115.80.
Shinichiro Kadota, senior FX strategist at Barclays in Tokyo commented; “The market is anticipating a more aggressive US rate hike scenario – or at least the risk of it – in 2022, and this certainly remains the main support for the dollar.
He added; “The key question for this year is where is inflation going, where is it peaking? “
Rising US yields continued to have a significant impact on currency markets.
The Yen remains strongly correlated with yield trends and the exchange rate of the British Pound against the Yen (GBP / JPY) strengthened to 2-month highs just below 156.0.
The New Zealand dollar was unable to advance as the exchange rate of the British pound against the New Zealand dollar (GBP / NZD) posted a 4-month high at 1.9870 before a limited correction.
The Canadian dollar has seen high volatility as the exchange rate of the British pound to the Canadian dollar (GBP / CAD) retreated from three-month highs just below 1.7300.
The day to come
US data releases will be important this week, especially with US bond yields significantly higher in the past few days.
US ISM manufacturing data and job posting data will be released on Tuesday, with markets monitoring employment and inflation trends in the data.
European gas price trends will be watched closely after huge volatility during the holiday season with more than 50% drop from the highs recorded on December 21.
The UK will release the latest data on loan and mortgage approvals.