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Pound Jumps amid Omicron Optimism, US Dollar Strengthened by Rising Fed Hike Odds

The Pound continued to trend higher this week as GBP investors welcomed the confirmation that the UK government has no immediate plans to introduce new Covid restrictions. 

At the same time, the US Dollar also strengthened this week, as the currency was underpinned by speculation the Federal Reserve will hike interest rates earlier than previously expected. 

Pound Bolstered by UK Government’s Plans to ‘Ride Out’ Omicron  

GBP/EUR – Up one cent on the week’s opening levels 

GBP/USD – Unchanged on the week’s opening levels 

The Pound rallied through the first half of this week after Boris Johnson’s suggestion that England will be able to ‘ride out’ Omicron without further restrictions bolstered hopes the UK will be able to avoid further economic disruption from the Covid variant.  

However, Sterling then faltered in the second half of the session, as surging infections and a weak services PMI took their toll on the currency. 

In addition to domestic Covid developments, the Pound is also likely to be influenced by the publication of the UK’s latest GDP figures, with an acceleration of economic growth in November potentially buoying Sterling sentiment. 

Euro Undermined by USD Strength 

EUR/GBP – Down one pence on the week’s opening levels 

EUR/USD – Down one cent on the week’s opening levels 

The Euro trended broadly lower this week as the single currency’s negative correlation with the US Dollar saw it retreat as the latter strengthened.  

The Euro then largely maintained these losses throughout remainder of the session in spite of some positive German data and a surprise acceleration of Eurozone inflation in December. 

Turning to next week’s session the focus for EUR investors is likely to be on the publication of Germany’s latest GDP figures. Will the surge in domestic Covid cases have dragged on growth in the last quarter and have resulted in a weaker-than-expected GDP reading for 2021? 

US Dollar Rallies on Fed Rate Hike Bets 

USD/GBP – Unchanged on the week’s opening levels  

USD/EUR – Up one cent on the week’s opening levels  

Expectations that the Federal Reserve may hike interest rates at an accelerated pace in 2022 helped to underpin demand for the US Dollar this week.  

This helped to offset some lacklustre US data, particularly December’s disappointing non-farm payroll release, which may have otherwise sent the ‘Greenback’ sharply lower. 

Centre stage next week will be the publication of the latest US consumer price index. If December’s release reports US inflation continued to climb then this this would support Fed rate hike speculation and likely send the US Dollar higher. 

Australian Dollar Slips in Bearish Trade 

AUD/GBP – Down one pence on the week’s opening levels 

AUD/USD – Down one cent on the week’s opening levels 

The Australian Dollar has spent much of the past week on the defensive, with a gloomy market mood sapping the appeal of the risk-sensitive ‘currency.  

While the ‘Aussie’ made an attempt to rally in mid-week trade, this was cut short by a surge in the US Dollar following the publication of some hawkish FOMC minutes. 

Looking ahead, the release of Australia’s latest trade figures will be the primary focus for AUD investors next week, with the Australian Dollar potentially extending its downside momentum if the nation’s trade surplus continued to narrow in November. 

Key Data  

Jan 10 EUR Unemployment Rate (Nov)  

Jan 11 AUD Trade Balance (Nov) 

Jan 11 AUD Retail Sales (Nov) 

Jan 12 EUR Industrial Production (Nov)  

Jan 12 USD Inflation Rate (Dec) 

Jan 14 GBP GDP (Nov) 

Jan 14 GBP Trade Balance (Nov) 

Jan 14 GBP Industrial Production (Nov) 

Jan 14 EUR German Full Year GDP (2021)  

Jan 14 USD Retail Sales (Dec) 

Jan 14 USD Consumer Sentiment (Jan)