Risk conditions remained more fragile on Thursday amid reservations over the impact of the Omicron variant.

Risk conditions remained more fragile on Thursday amid reservations over the impact of the Omicron variant.

There was choppy trading in Treasuries with a weak 30-year bond auction helping to push yields higher. There was caution ahead of the important US CPI data on Friday.

Wall Street equities lost ground as caution prevailed. Asian equities overall tended to lose ground with further reservations over the Chinese real-estate sector.

The dollar secured a net advance on expectations of faster Fed tapering. EUR/USD dipped below 1.1300 before stabilising close to this level. Sterling recovered from intra-day lows with some support on valuation grounds.

Commodity currencies lost ground amid a firm US dollar and weaker risk conditions.

The German trade surplus declined in October with solid monthly growth in exports and imports for the month, although there was no significant impact.

There were further reports of potential ECB policy action at next week’s policy meeting with some expectations of a temporary boost to bond purchases. The Euro overall was unable to make any headway ahead of the New York open with underlying yield spreads undermining support with a further decline in short-term Euro yields.

US initial jobless claims declined to 184,000 in the latest week from a revised 227,000 the previous week. This was below consensus forecasts of 215,000 and the lowest figure since 1969. Continuing claims increased to 1.99mn from 1.95mn and slightly above expectations, but the initial claims data maintained confidence in the labour market even with potential distortions surrounding the Thanksgiving period.

The dollar was able to regain further ground the day with commodity currencies losing ground and EUR/USD dipped below the 1.1300 level.

There was a significant element of caution ahead of the US CPI release on Friday. Consensus forecasts are for a further sharp increase in the headline rate to 6.8% from 6.2% which would be the highest rate since 1982 while the underlying rate is forecast at 4.9% from 4.6%. Stronger than expected data would increase pressure on the Federal Reserve to tighten policy more quickly and announce a change at next week’s policy meeting while a lower release would provide some relief.

Narrow ranges prevailed on Friday with EUR/USD finding some further support below 1.1300 despite negative underlying sentiment.

Chinese new loans increased CNY1,270bn for November from CNY826bn the previous month, although this was below consensus forecasts of CNY1550bn. There was a stronger increase in total social financing of CNY2,610bn which was only slightly below expectations while money supply growth slowed to 11.7% from 11.9%.

The Chinese central bank announced that it would increase the reserve ratio on foreign exchange purchases to 9% from 7%  which was aimed at curbing yuan appreciation and the yuan dipped sharply following the release, although the dollar was unable to make any headway against the yen.

Risk appetite remained more fragile during Thursday with the WHO stating that a further 2-3 weeks would be needed to study the Omicron variant more thoroughly.

US Treasuries strengthened during the day and the 10-year bond yield retreated to below 1.50% which sapped dollar support. The yen also secured an element of defensive support and USD/JPY dipped below 113.50.

There were further reservations over the outlook for the Chinese property sector, although the yuan recovered from Thursday’s dip lower.

Asian markets overall lost ground during the session and USD/JPY settled close just below 113.50 with EUR/JPY around 128.20.

Sterling came under further pressure ahead of Thursday’s New York open with a GBP/USD retreat to near 1.3170. Sentiment was undermined by unease over the impact of further coronavirus restrictions with the risk that a sharp increase in Omicron infections would undermine the economy as a whole. There was also a further downgrading of expectations that the Bank of England would raise interest rates next week, especially given coronavirus uncertainty.

GBP/USD did avoid a fresh 2021 low against the dollar which helped trigger a recovery to the 1.3200 area despite a generally cautious tone surrounding global risk appetite and GBP/EUR also rallied back towards 1.1700. Sterling gained some net support on valuation grounds.

UK GDP increased 0.1% for October after a 0.6% increase the previous month and below consensus forecasts of 0.4% with further weakness in industrial production and construction. The data will maintain unease over underlying trends in the economy, especially with concerns that the services recovery will falter.

Economic Calendar

Expected Previous
07:00 GBP Industrial Production (Y/Y)(OCT) 3.10% 3.70%
07:00 GBP Industrial Production (M/M)(NOV) -0.40%
07:00 GBP Manufacturing Production (M/M)(OCT) 0.10%
07:00 GBP Manufacturing Production (Y/Y)(OCT) 2.80%
07:00 GBP Trade Balance(NOV) -14.74B
07:00 GBP Trade Balance Non EU(NOV) -9.10B
07:00 Germany CPI (M/M)(DEC) -0.20% -0.20%
07:00 Germany CPI (Y/Y)(NOV) 5.20% 5.20%
07:00 Germany Harmonised CPI (M/M)(NOV) 0.30% 0.30%
07:00 Germany Harmonised CPI (Y/Y)(NOV) 6.00%
09:00 Industrial Output YY WDA(OCT) 3.30% 4.40%
09:00 Industrial Output MM SA(OCT) 0.10%
13:30 USD CPI Ex Food & Energy (Y/Y)(NOV) 4.60%
13:30 USD CPI Ex Food & Energy (M/M)(NOV) 0.60%
13:30 USD CPI (M/M)(NOV) 0.90%
13:30 USD CPI (Y/Y)(NOV) 6.20%
16:00 USD Michigan Consumer Sentiment(NOV 15) 63.5
18:00 USD Baker Hughes US Oil Count 467
19:00 Monthly Budget Statement(NOV) -179.0B -165.0B

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.