Risk appetite was notably weaker with Omicron and inflation fears also crucial in sapping confidence.

There were hawkish comments from Fed Chair Waller on Friday which reinforced expectations of monetary tightening.

Risk appetite was notably weaker with Omicron and inflation fears also crucial in sapping confidence.

US bond yields were little changed on Friday before declining on Monday with fresh doubts over US fiscal stimulus.

Wall Street equites lost ground with sharp losses for US futures on Monday. Asian equity markets also posted losses despite a small rate cut in China.

The dollar posted strong net gains with defensive demand and expectations of Fed tightening providing support. The Euro came under renewed pressure and EUR/USD dipped below 1.1250 before stabilising. Sterling was hurt by weaker risk conditions with GBP/USD losses to near 1.3200.

Commodity currencies dipped sharply as the US dollar strengthened with AUD/USD trading just below 0.7100.

The German IFO business confidence index retreated to 94.7 for December from 96.6 the previous month and below consensus forecasts of 95.3. The current conditions index dipped to 96.9 from 99.0 in November with the expectations component retreating to 92. 6 from 94.2 with both figures below market expectations.

The IFO commented that consumer-facing businesses have suffered a drop in business while raw material and supply-side difficulties have got worse with widespread price increases. The Euro was hampered by the data and unable to make any headway ahead of the New York open. Following the central bank policy meetings this month, there were still strong expectations that yield spreads would favour the US dollar.

There were also further concerns over the damaging impact of very high gas prices on the Euro-zone economy with pre-weekend position adjustment a significant factor.

EUR/USD dipped back below the 1.1300 level and continued to lose ground later in the session with some negative impact from Russia-Ukraine tensions.

Fed Governor Waller stated that inflation was alarmingly high and that a rate hike will be warranted shortly after the taper ends. He added that the whole point of the faster taper was to make March a live meeting and that his base case was that a March hike is very likely. The dollar posted further net gains and EUR/USD retreated sharply to below 1.1250. San Francisco Fed President Daly stated that she was keeping an open mind about how many rate hikes there will be next year.

Trading volumes will gradually decline during the week ahead of the holiday period and position adjustment is liable to contribute to choppy trading.

Despite further Euro-zone coronavirus restrictions, EUR/USD traded around 1.1250 on Monday with an element of protective support from the vulnerable risk conditions.

US futures lost ground ahead of the Wall Street open and equity indices continued to retreat later in the day amid fragile generally fragile conditions.  There was a further recovery in Treasuries during the day with the 10-year yield dipping below 1.40%. Lower yields hampered the dollar and the yen gained fresh support on the crosses. USD/JPY dipped to lows near 113.10 before a recovery to above 113.50 as the US currency secured wider support from hawkish comments from Fed Governor Waller.

CFTC data recorded a decline in short yen positions to 53,000 contracts in the latest week from 63,000 previously.

Risk appetite dipped in Asia on Monday with confidence in the US fiscal expansion plan undermined by Senator Manchin’s comments that he will not support Biden’s build back better fiscal reform package. US futures retreated sharply following the reports, especially with important reservations surrounding Omicron.

China announced a small cut in interest rates with the 1-year loan rate reduced to 3.80% from 3.85%, but regional bourses were lower and the yen secured further net support on the crosses with USD/JPY trading just below 113.50 while EUR/JPY was below 128.0.

In comments on Friday, Bank of England chief economist Pill stated that the central bank will need to increase interest rates further if inflation persists and that domestically generated inflation pressures are likely to be more persistent. Pill acknowledged risks associated with Omicron, but also noted that there are two-sided risks given that supply-side disruptions would put further upward pressure on inflation, although labour-market trends will also be watched closely.

Sterling again failed to gain wider support with sentiment hampered by generally weaker risk appetite and unease surrounding Omicron developments.

CFTC data recorded an increase in short Sterling contracts to over 50,000 contracts from 38,000 previously and the largest short position for over two years.

Over the weekend, Brexit Minister Frost resigned, reinforcing internal tensions within the government, although Truss could be seen as a safe pair of hands. Risk conditions tended to dominate on Monday and GBP/USD retreated to near 1.3200 with GBP/EUR back above the 1.1730 level.

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