Risk appetite held steady amid hopes the Omicron wave was peaking in the US and Europe.

Narrow ranges prevailed on Monday with activity curbed by a US market holiday. Risk appetite held steady amid hopes the Omicron wave was peaking in the US and Europe. There were further concerns over underlying inflation trends.

US bond yields moved higher on Tuesday with the 10-year yield at 2-year highs around 1.84%.   Asian equity markets were slightly less confident as yields increased.

The dollar was supported by higher yields and expectations of aggressive Fed tightening. EUR/USD edged below the 1.1400 level, but demonstrated some resilience. Sterling was unable to make headway with GBP/USD below 1.3650, but overall selling was contained.

The Australian dollar drifted lower amid a firm US dollar tone. The Canadian dollar was supported by a strong business survey and strength in oil prices.

Oil prices posted further gains to 7-year highs amid demand expectations. Precious metals were hampered by higher bond yields. Higher bond yields also sapped support for Bitcoin.

The Euro was unable to make any headway ahead of Monday’s New York open and tended to drift lower, although the main feature was narrow ranges.

There was a slight shift in market pricing for the ECB with futures markets indicating 20 basis points of tightening by the end of 2022 compared with around 17 basis points last week despite the central bank’s insistence that conditions for a rate increase were very unlikely to be met this year.

The dollar, however, was also supported by expectations that the Federal Reserve will have to tighten more aggressively to curb inflation pressures and would signal a potential March hike at the January meeting. Market expectations continued to increase with the potential for at least three rate hikes this year. The surge in oil prices to fresh 7-year highs will complicate central-bank decision making in the short term.

There were no significant data releases during the day and a US holiday had an important impact in curbing trading activity. Federal Reserve officials will also not be making any further comments on monetary policy ahead of next week’s policy statement. Commodity currencies were held in tight ranges and EUR/USD consolidated around 1.1400 at the European close amid low trading volumes.

US yields moved higher in Asia on Tuesday which underpinned the dollar and EUR/USD traded just below the 1.1400 level, but was able to demonstrate some resilience.

Trends in equity markets will also continue to be potentially important for overall currency moves with volatility levels liable to increase.

There were further reservations over potential coronavirus trends in China with concerns that there could be an Omicron outbreak which could lead to further lockdowns and disruption to global supply chains. The impact was, however, limited by speculation that the Chinese authorities would adjust their strategy and attempt to limit lockdowns. The national strategy into the new-year period will be an important focus and have a significant impact on global sentiment and market sentiment.

Equity markets overall held firm which limited potential defensive support for the Japanese currency and USD/JPY settled just above 114.50.

The Bank of Japan made no changes to monetary policy in the latest statement with a target of 0% for 10-year yields, although the bank upgraded the inflation forecast slightly. There had been some speculation that there would be a more hawkish stance and the yen lost ground following the decision.

The main focus during Tuesday’s Asian session was US bond futures with a sharp decline as the 10-year yield increased to around 1.84% and the highest level for two years. Higher yields supported the dollar while Asian equities were resilient despite weaker US futures.

Overall, the USD/JPY strengthened to highs just above 115.00 before a slight retreat to 114.90 with EUR/JPY around 130.80.

Ahead of the New York open, there was speculation that England could ease coronavirus restriction late this week or early next week with the current restrictions due for review on January 26th. Sterling, however, was unable to make any headway, especially with positive developments seen as priced in.

Overall risk appetite held steady which limited the potential for more substantial UK currency selling and narrow ranges prevailed.

The latest labour-market data recorded a decline in jobless claims of 43,000 for December and unemployment edged lower to 4.1% from 4.2% in the three months to November. The wages data was in line with expectations as the underlying rate slowed to 3.8% from 4.3%.

The latest inflation data will be released on Wednesday which will be important for Bank of England expectations and Governor Bailey is also due to testify to the Treasury Select Committee on the same day with his rhetoric monitored very closely. GBP/USD traded just below 1.3650 with GBP/EUR around 1.1960.

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