USD & GBP bounce back into 2022

We hit the ground running in 2022 – a big week for data, and 2022 will almost certainly mark the turning point for monetary policy as developed nations raise interest rates at different speeds to combat inflationary pressures.

 USD: With 3 rate rises throughout 2022 indicated by the Federal Reserve, many market participants were surprised by the USD decline in Dec21. The USD is responding by rising into 2022 – US yields are rising, indicating that markets expect US growth to be impactful, in the face of the Omicron variant and other headwinds.

 With 10yr yields rising to 1.63%, maybe the 2% psychological level looks achievable in 2022, and will keep pushing the USD higher. The USD is the driver behind €/$, which is now trading at 1.1300.

 Interesting this week will be the publication of the Federal Reserve Minutes of the previous meeting – on Wednesday evening. It will hint at the committee’s desire to combat inflation and raise rates.

Friday sees the release of employment data and the market will react to this indicator.

 The positive for the Fed is they have until the end of Q1 to complete the end of their bond buying program before they expect to begin increasing rates.  This means they will have another quarter of valuable data which will afford them the opportunity to pivot either way.   Some expect inflation will remain elevated until at least H1 2022, but Fed policy has priced this in as a base case scenario, and the predicted 3 rate increases for 2022 looks fair. 

 GBP: A strong rally into the end of 2021 is carried forward into 2022 as GBP/EUR hits more high levels -trading above 1.1850 and remaining resilient.

GBP/USD snapped a three-day winning streak on Monday and seems to have gone into a consolidation phase around 1.3470 early Tuesday. British Prime Minister Boris Johnson reiterated that they will not reintroduce explicit lockdowns but warned of rising pressure on the healthcare system. This willingness to remain open, without the healthcare system collapsing, which has driven GBP strength.

Later today we have Manufacturing (ISM) data – without a positive showing for December, this might halt recent strength in its tracks.

 If the economy is held back, as some early December data suggests, from one or a combination of possible risks such as Omicron, increasing energy costs, supply chain issues, and labor shortages, the MPC could find themselves having to adjust forward guidance to keep policy loose.   Currently the market has absorbed the small increase with very little impact and at this juncture the MPC should be able to manage expectations in H1 without causing too much disruption. 

EURO: German Retails dropped 2.9% on an annualised basis, showing the reality of rising prices and the impact of the pandemic upon consumer behaviour. After declining throughout Q4 2021, it will be hard for markets to stop this momentum – however, the big move seems to have happened, with many market commentators suggesting a period of consolidation.

What’s ahead this week:

 Wednesday: USD employment data & Federal Reserve publication of the previous meeting’s minutes**

Thursday: German inflation data & Factory Orders* / US Services sector data*

Friday: European Inflation** & Sales data* / Canadian Unemployment / US Unemployment***

EUR/USD          1.1300

GBP/USD         1.3475

GBP/EUR         1.1900

USD/CAD          1.2720

EUR/CAD          1.4400