Further Sterling Gains Capped On Lockdown Extension
Global developments influenced play and the Pound had a relatively quiet day, still protected by vaccine hopes, but conversely there were also expectations that lockdown would be extended. Also reported, a record number of UK coronavirus deaths, over 1,600 for the day but at least new cases declined. Sterling moved above 1.3600 on the Dollar and the Euro drifted just below 1.1235 from highs close to 1.1210, essentially on hopes that the global economic recovery would help underpin the UK economy.
This morning December’s headline CPI inflation increased to 0.6% (from 0.3% last December) and the core rate rose to 1.4% from 1.1% beating expectations of 1.3%. Chief economist at the Bank of England, Andy Haldane stated that the bounce back from the covid pandemic may be swifter than the 2008 financial crisis adding that the UK does not need higher inflation that would cause borrowing costs to increase. Sterling nudged higher following the relatively optimistic comments, although reaction was limited given that negative rate speculation has faded. Sterling edged above 1.3650 against the dollar with the Euro just below 1.1235 as the dollar remained on the defensive.
The dollar failed to secure a significant recovery from yesterday’s fall.
There were strong expectations of reflationary policies by the US Biden Administration, especially with strong expectations of further fiscal support. US inflation expectations increased to the highest level since October 2018 which implied a further erosion of real yields and contributed to a weaker US dollar.
The Italian government survived a Senate confidence vote which capped domestic bond yields, but there were further near-term concerns over euro-zone coronavirus developments. Dollar weakness dominated on Wednesday with the Euro edging just above 1.2150 as commodity currencies posted net gains.
The German ZEW economic sentiment index strengthened to 61.8 for January from 55.0 the previous month and above consensus forecasts of 60.0. The current conditions index recorded only a marginal recovery to -66.4 from -66.5, although slightly stronger than market expectations. The Euro-zone ZEW index strengthened to 58.3 from 54.4 the previous month.
The Euro was hampered somewhat by reports that the central bank would pursue a yield-control policy and continued to make limited headway ahead of the US session open. The single currency moved above the 1.2100 level as expectations grew that the US would pursue aggressive monetary and fiscal policies.
German Chancellor Angela Merkel also confirmed a deal had been reached with state leaders to extend the national lockdown measures until February 14th which was in line with market expectations
As of writing, the Euro currently trades just over the 1.2150 mark against its US counterpart.
Data to watch
12:00 – GBP – BOE Gov Bailey Speaks
Tentative – USD – President Biden Speaks + Inauguration