USD dominating GBP and EUR, EUR bettering GBP
As we start the last full working week of the year GBPUSD hovers at 1.32 and GBPEUR is just above 1.1700, with clear downward momentum. EURUSD is around 1.1260.
Despite last weeks surprise interest rate rise from the Bank of England (0.15% to 025%) and further comments from the Bank of England’s chief economist, Huw Pill, that interest rates would have to rise further in the coming year, GBP failed to keep the gains it had made against USD and EUR last week.
Clearly the continuing Omicron narrative is driving a stronger dollar due to global risk aversion. However, global risk aversion is only one part of the story for USD:
Simultaneously US inflation is running “alarmingly high”, according to Fed Governor Chris Waller, and there is a real prospect of interest rate rises in the new year after the Fed have finished tapering. Meanwhile the Fed are actively reducing the amount of support they provide the economy through this same tapering (tapering being the process of reducing the amount of money the Federal reserve puts into the economy through the purchase of bonds).
So overall we have 3 reasons for the USD to outperform GBP (and most likely EUR): 1. Global Risk 2. Tapering 3. Potential interest rate rises
USD is also dominating EUR, with EURUSD reaching near one year lows.
As ever, when there are global risk issues, there is always one eye on the Swiss Franc/CHF. With it’s safe haven status and history of government intervention, the market is always cautious of sharp moves in CHF.
For the coming 2 to 3 weeks there is little in the way of significant data releases and the market becomes quiet. Interestingly there is some research to suggest that all currencies on average appreciate against the USD in December – we shall see.