Sterling jumped after the Bank of England raised interest rates.
The ECB announced that emergency bond purchases will end in March, but the central bank will continue asset purchases throughout 2022.
Risk appetite initially held firm on Thursday, but gradually deteriorated as Omicron concerns sapped support. US bond yields edged lower on the day amid hopes that inflation will retreat next year.
The dollar recovered from intra-day lows, but lost ground against low-yield currencies. The yen and Swiss franc held firm after no policy changes from respective central banks. EUR/USD jumped on higher ECB inflation forecasts and held net gains to trade above 1.1300.
Sterling jumped after the Bank of England raised interest rates, but failed to hold initial spike highs with GBP/EUR resistance around 1.1800.
Commodity currencies posted strong gains before fading as risk appetite retreated.
The Euro-zone flash manufacturing index edged lower to 57.8 for November from 58.4 the previous month, but marginally above consensus forecasts. The services-sector recorded a larger than expected decline to an 8-month low of 53.3 from 55.9 the previous month with the German services sector in contraction.
The ECB left interest rates at 0.0% following the latest policy meeting, in line with expectations. The central bank announced that the PEPP bond purchases would end in March 2022. The bank, however, also announced that the on-going APP bond-buying would continue at an increased rate of EUR40bn in the second with a reduction to EUR30bn for the third quarter and EUR20bn for the fourth quarter. Reinvestments will continue into 2024 and there was no formal end date for APP purchases.
The ECB increased its 2022 inflation forecast sharply to 3.2% from the 1.7% forecast in September while there was a downgrading of growth forecasts.
The Euro increased sharply in an immediate response with money markets signalling an increased potential for a rate increase next year. President Lagarde stated that the risks to the outlook were balanced, although she reiterated that the conditions for a rate hike were very unlikely to be met in 2022.
EUR/USD peaked above 1.1350 before a retreat to near 1.1300 towards the European close as hawkish members expressed concerns over on-going bond purchases.
EUR/USD still found support on dips and advanced to 1.1340 in early Europe on Friday with position adjustment likely to be an important element during the day.
US initial jobless claims increased to 206,000 in the latest week from 188,000 previously and slightly above consensus forecasts of 200,000 while continuing claims declined to 1.85mn from 2.00mn previously. Housing starts increased to an annual rate of 1.68mn from 1.50mn previously and above expectations of 1.57mn while building permits increased to an annual rate of 1.71mn. The Philadelphia Fed manufacturing index retreated to 15.4 for December from 39.0 previously and well below consensus forecasts of 30. There was a sharp slowdown in the new orders and unfilled orders components with shipments growth also slowing. Employment continued to increase strongly on the month while there was a slight easing of inflation pressures.
US Treasuries lost ground at the New York open, but there was a quick reversal with yields losing ground and the 10-year yield below 1.45%. The dollar was unable to hold gains and selling increased after a dip back below the 114.00 level with a USD/JPY retreat to 113.70 at the European close.
The Bank of Japan made no changes to monetary policy with a slight lessening of coronavirus support measures. Regional equity markets lost ground amid a more tentative risk tone and reservations over the Chinese outlook. USD/JPY remained on the defensive as it traded just above 113.50 against the yen.
According to flash data, the UK PMI manufacturing index retreated to a 3-month low of 57.6 from 58.1 previously and in line with consensus forecasts. There was a sharper decline in the services-sector index to a 10-month low of 53.2 from 58.5 in October with a notable retreat in business confidence while cost pressures eased.
The Bank of England increased interest rates by 0.15% to 0.25% at the latest meeting. Although there had been speculation over a rate hike at this meeting, the consensus was for the bank to wait until February. The bank noted uncertainties surrounding Omicron, but considered that elevated inflation pressures demanded immediate action, especially with inflation set to increase to 6% early next year. There was an 8-1 vote for the decision with Tenreyro voting to wait for more information.
Sterling jumped higher after the data with a GBP/USD move to above 1.3350 while GBP/EUR jumped to near 1.1830. Sterling failed to hold best levels amid reservations over Omicron developments, although GBP/USD did hold above 1.3300.
Pressure on PM Johnson increased as the government lost a key by-election, but there were reports of a more conciliatory stance on the Northern Ireland protocol. GBP/USD traded around 1.3330 on Friday with GBP/EUR just above 1.1750.
The monthly UK retail sales data was stronger than expected with a 1.4% increase, but markets expected a notably weaker figure for December with little market impact.
|07:00||EUR German PPI (Y/Y)(NOV)||19.90%||18.40%|
|07:00||EUR German PPI (M/M)(NOV)||1.40%||3.80%|
|07:00||GBP Retail Sales (M/M)(NOV)||0.80%||1.10%|
|07:00||GBP Retail Sales (Y/Y)(NOV)||4.30%||-1.30%|
|07:00||GBP Retail Sales ex-Fuel (Y/Y)(NOV)||2.40%||-1.90%|
|07:00||GBP Retail Sales ex-Fuel (M/M)(NOV)||0.80%||2.00%|
|09:00||IFO - German Current Assessment(DEC)||99|
|09:00||German Business Expectations(DEC)||94.2|
|09:00||German IFO Business Climate Index(DEC)||96.5|
|10:00||Euro-Zone Core CPI (Y/Y)(NOV 01)||2.00%|
|10:00||Euro-Zone CPI (Y/Y)(DEC)||4.90%|
|10:00||Euro-Zone CPI (M/M)(NOV)||0.80%|