Currency Note

Sterling powers into New Year beating 2021 high

By alexbennett January 4th, 2022

Sterling starts on the upswing, hovering around its best rate for the past year, as fears over the Omicron variant of Covid-19 dissipate and the markets look forward to more interest rate rises this year.

Sterling has gained well over 7% over the course of the year to be among the best performing major currencies.

At the start of the year it’s tempting to frame in one’s mind how the year will pan out, so data this week could set the tone. There is a lot of data for the markets to chew on for USD and EUR, less so for GBP.

We have to wait another month for the interest rate decisions from the Bank of England (BoE) and European Central Bank (ECB), both of whom make their announcements on 3rd February, while the US Federal Reserve FOMC meets on 28th and 29th January.

In the business news, stock markets in Europe and the US hit a new record, as demand powers ahead and supply chain bottlenecks ease.

Meanwhile, yesterday in a New York court Elizabeth Holmes was found guilty of fraud over her failed blood-testing company Theranos.

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GBP: Pound rises to challenge of 2022 but questions persist

Sterling has strengthened again this morning, equalling its highest point of the past year. The driver has undoubtedly been the news that while Omicron infection rates are massive, hospitalisations are manageable so long as the population has a vaccination boost, which in the UK most adults have.

Moreover, while business has continued, those most at risk appear to be protecting themselves, with retail, hospitality and entertainment venues open, but quiet.

Much will depend on whether the return of schools today causes the more vulnerable elements of society to be infected, increasing the call for further lockdown measures.

There are also fears over new Brexit trade restrictions that come into effect in 2022 and could disrupt supply lines that are only just recovering from the disruption of 2021.

While yesterday saw a slew of data releases across the eurozone there was nothing from the UK, it being a Bank Holiday. Later today we’ll hear data on consumer credit and mortgage lending, as well as a final reading for Manufacturing PMI.

The rest of the week continues fairly sluggishly for data, with new car sales and services and composite PMI on Thursday, then house prices on Friday from the Halifax.

GBP/USD past year

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EUR: Euro on back foot but data offers hope

The single currency has swung wildly against the US dollar over the break, but starts 2022 at the same rate as early December, around $1.13. Over the same time period it has dropped by around 1.3% against sterling.

There was some relief for the eurozone this morning with some positive data releases. Germany saw retail sales for November leaping ahead of expectations. Spain’s new unemployment claims were well below expectations, falling by nearly 77,000. French inflation at 0.2% for December was half the 0.4% predicted.

Later today we’ll hear about unemployment for December in Germany, with Europe’s largest economy in the grip of Omicron. Tomorrow there is Italian inflation, where anything of 4% or over could affect EUR. Even more importantly, will Thursday’s German inflation reading exceed last month’s 5.2%? Or Friday’s euro area inflation reading exceed last month’s 4.9%?

There is no interest rate decision until 3rd February, but a picture of worsening inflation could well encourage the euro to strengthen on the promise of monetary policy tightening.

USD: Dollar poised in big week for data

The dollar was the big winner in 2021, strengthening by 0.5% and 1% against its top 10 rivals. However, you might not guess that from the start of this year, where the dollar has slipped a little or moved nowhere against all but JPY.

The USA has some interesting data releases this week, including ISM Manufacturing PMI and job openings this afternoon, employment change tomorrow – as well as the FOMC minutes – and Balance of Trade on Thursday. On Friday tune in for non-farm payrolls.

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