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Negative interest speculation continues

Negative interest speculation continues

GBP

UK services PMI was revised lower to 49.4 from the preliminary reading of 49.9. There were further concerns over the near-term outlook but business confidence strengthened to the highest level in over six years as companies expect a rebound during 2021.

Bank of England Governor Bailey made no comments on monetary policy, but there was further speculation of negative interest rates, especially with further near-term damage to the economy.

Sterling peaked at 1.3680 on the Dollar, but fell sharply below 1.3550 once the US came online. The Euro posted one-week highs against the Pound of near 1.1010. The latest virus data recorded a record increase in new daily infections of over 62,000 with over 1,000 deaths reported for the day and there were further reports over the potential for major pressure on the health service. The Pound did find support against a weaker Dollar and moved back above 1.3600 in choppy trading. Sterling opens just below 1.3600 this morning with the Euro around 1.1031.

 

USD

The US currency remained under pressure amid assumptions that US real interest rates would remain negative and inflation would move higher. The dollar index declined to the lowest level since March 2018 with the Euro peaking at 32-month highs at 1.2350.

US ADP data recorded a decline in private-sector payrolls of 123,000 for December following a revised increase of 304,000 the previous month and much lower than market expectations of a 90,000 gain as large companies cut jobs. The dollar regained some ground after the Wall Street open with some expectations that the US currency would be supported by stronger growth if there was a further increase in fiscal spending.

Minutes from December’s Federal Reserve (Fed) minutes illustrated divergence between the short and long-term outlook. There were near-term concerns over the outlook, although there was little enthusiasm for increasing bond purchases and a number of participants noted that there would be scope to taper purchases once substantial progress had been made in attaining Fed goals.

 

EUR

The final reading for the Euro-zone PMI services-sector index was revised down significantly to 46.4 from the flash reading of 47.3 with the Italian index notably weaker than expected. German consumer prices increased 0.5% for December with the year-on-year rate unchanged at -0.3%.

The Euro closed above 1.23 mark against the Dollar yesterday after failing to do so in the previous four trading days. Currently the pair is trading just under the 1.23 level, having set fresh multi-year highs of 1.2349. The pair has taken out the previous resistance with the US Dollar losing ground on increased expectations for significant fiscal stimulus.

The upside in the single currency could likely gather steam if the German data out this morning shows Factory Orders rose in November versus expectations for a 1.2% drop. However, while the path of least resistance appears to be on the higher side, further gains may not happen immediately if the market focus shifts to prospects of stricter regulation and higher taxes under Biden’s presidency.

 

Data to watch

14:30 – USD – Unemployment Claims 

16:00 – USD – ISM Services PMI

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