GBP/EUR at fresh 22-month highs near 1.2000.

There was choppy trading during Tuesday with sharp moves across most asset classes after the US open. Markets attempted to take a positive stance towards Omicron with a focus on long-term recovery hopes rather than short-term disruption.

US bond yields remained at elevated levels but held below October highs. Wall Street equities edged lower with a sharp correction for the Nasdaq index.

The dollar was mixed with limited losses against high-risk currencies. EUR/USD was little changed close to 1.1300. USD/JPY retreated slightly from fresh 5-year highs around 116.35.

Sterling posted net gains on longer-term recovery hopes and short covering with GBP/EUR at fresh 22-month highs near 1.2000. Commodity currencies recovered from Monday’s sell-off in choppy trading.

German unemployment declined a further 23,000 for December after a 34,000 fall the previous month and compared with expectations of a 15,000 decline. Retail sales increased 0.6% for November with a 2.9% annual decline and slightly stronger than expected, but there was little impact from the data releases.

ECB council member Villeroy stated that inflation is close to peaking in France and the Euro-zone and the Euro overall lost ground into the New York open with a EUR/USD retreat to near 1.1270 as yield spreads undermined the single currency.

The US ISM manufacturing index declined to 58.7 for December from 61.1 the previous month and below consensus forecasts of 60.0. There were also modest slowdowns in the growth rate of new orders and production. Employment increased at a slightly faster rate on the month while order backlogs increased. There was a slight easing of supply-side difficulties on the month while there was a significant easing of pricing pressures with the price’s component at the lowest level for 13 months.

The JOLTS job-opening data recorded a decline to 10.56mn for November from 11.09mn the previous month and below market expectations, although the higher quits rate continued to indicate a tight labour market which will tend to maintain upward pressure on wages. The latest New York survey suggested that pressures in global supply chains may have peaked with markets and the Federal Reserve watching developments closely.

There was choppy dollar trading after the New York open with EUR/USD peaking around 1.1320 before dipping back below 1.1300 to end little changed. Narrow ranges prevailed on Wednesday with EUR/USD just below 1.1300 as the immediate market focus turned towards the US jobs data.

The dollar strengthened further ahead of Tuesday’s New York open with wider US support and a further boost from higher yields. USD/JPY posted fresh 5-year highs around 116.35. Minneapolis Fed President Kashkari stated on Tuesday that he expects two rate increases in 2022, although he also noted that there was remarkable economic and policy uncertainty. This is a notable shift from Kashkari who maintained a dovish stance during last year.

Markets continued to expect a more aggressive Fed stance in the short term and a potential rate increase before mid-2022 which underpinned the US currency.

US yield remained higher with the 10-year rate at fresh 5-week peak, but USD/JPY was unable to secure further gains with consolidation above 116.00 while the yen remained on the defensive despite a retreat in US technology sector.

There was a more cautious tone surrounding Asian equity markets with fresh reservations over the Evergrande situation with a key meeting of bondholders next week.

US yields edged lower on Wednesday with USD/JPY drifting lower to 116.00 while EUR/JPY traded close to 131.0.

UK mortgage approvals edged lower to 67,000 for November from 67,100 the previous month while net consumer borrowing increased to £3.7bn from £1.1bn as consumer credit held firm on the month. There was limited impact from the data given that the spread of Omicron will dominate near-term trends in the economy and had no impact on November’s data. The final PMI manufacturing index was revised slightly higher to 57.9 from the flash reading of 57.6.

Sterling was able to resist selling pressure and gradually gained traction during the day with sentiment underpinned by a fresh GBP/USD move above 1.3500.

Prime Minister Johnson continued to resist any further coronavirus restrictions in England which provided an element of UK currency support, especially in relative terms, although there were reservations over the very high case numbers.

A dip in demand for defensive assets also supported the UK currency and there was a GBP/USD peak at 7-week highs just above 1.3550 while GBP/EUR posted gains to fresh 22-month highs below 1.2000. Sterling was unable to secure further gains on Wednesday with a slightly more cautious risk tone curbing the potential for further short covering as GBP/USD traded around 1.3530.

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