Prime Minister Johnson shied away from further coronavirus restrictions in England ahead of the Christmas holiday.

After a rebound in Asia, risk appetite remained much stronger during Tuesday with investors looking for a medium-term recovery. US bond yields moved significantly higher on the day.

Wall Street equities posted strong gains with a rebuilding of long positions.

Risk conditions were more subdued on Wednesday as major Omicron uncertainties sustained choppy price action. Asian equities were held in tight ranges as trading volumes declined.

The dollar was mixed with some support against low-yield currencies. EUR/USD was unable to break above 1.1300 and settled little changed. Sterling was boosted by stronger risk conditions, but GBP/EUR held just above 1.1760. Commodity currencies posted strong gains as US equity markets secured solid gains.

German consumer confidence dipped sharply to -6.8 for January from -1.8 in December and well below consensus forecasts of -2.7. There was choppy trading ahead of the New York open with EUR/USD unable to hold above the 1.1300 level.

There was a stronger tone surrounding risk appetite which curbed the potential for further Euro short covering and carry trades funded through the single currency.

The Euro was also undermined by concerns over the impact of very high energy prices with a further increase in gas prices during the day which will have a negative economic impact. German Chancellor Scholz stated that there is an urgent need for de-escalation on the Ukraine border with the Euro hampered by underling tensions.

ECB council member Kazimir stated that there is a risk that elevated inflation will stay for a longer time. He added that the bank would need to act if the inflation outlook changes for the next three years. Euro-zone consumer confidence retreated to -8.3 for December from -6.8 previously and the weakest reading since April 2021.

The Philadelphia Fed non-manufacturing index declined to 28.3 for December from 46.1 previously with robust readings for new orders and business activity. Employment indicators remained strong while inflation pressures eased slightly as markets continued to monitor supply-side issues.

The Euro gradually lost ground after the Wall Street open with a EUR/USD retreat to lows around 1.1260, although selling pressure remained limited. Narrow ranges prevailed on Wednesday with EUR/USD held close to 1.1270 as commodity currencies pared gains, but held a net advance from the previous day.

US Treasuries steadily lost ground after the New York open with the 10-year yield posting a notable increase to around 1.48% on the day and the highest level for over a week. Higher yields supported the dollar and the yen also lost defensive support as equity markets posted significant gains. In this environment, USD/JPY was able to strengthen to above the 114.00 level. Markets continued to monitor US fiscal policy developments with President Biden still optimistic that he could reach a deal with Democrat Senator Manchin to revive the Build Back Better plans.

There were further fluctuations in risk appetite on Wednesday with near-term fears over a surge in Omicron cases offset by longer-term hopes over vaccine developments with Astra Zeneca announcing that it will produce an updated vaccine which will target the Omicron variant.

The Chinese NDRC state planner announced further measures to support the economy, although Asian bourses were unable to make significant headway.

USD/JPY consolidated around 114.15 in early Europe on Wednesday with EUR/JPY around 128.60 with risk conditions dominant.

The UK CBI retail sales index retreated sharply to 8 for December from 39 the previous month and below consensus forecasts of 24.  Sales are expected to be poor for the time of the year in January with confidence inevitably undermined by concerns surrounding Omicron.  Overall stock levels were comfortable, but there were also concerns that Omicron would cause further disruption to supply chains. The data maintained reservations surrounding the outlook for consumer spending, especially with devolved governments imposing fresh restrictions which will dampen activity in the leisure sector.

Irish Prime Minister Martin stated that talks between the UK and EU on the Northern Ireland protocol were on track for progress which could underpin sentiment.

Prime Minister Johnson shied away from further coronavirus restrictions in England ahead of the Christmas holiday, but there were strong expectations of further action soon after and Scotland announced a further tightening from December 27th.

Sterling gained notable support from the recovery in risk appetite with a GBP/USD move to above 1.3250 while GBP/EUR rallied to test the 1.1760 level.

Economic Calendar