There were further expectations that the Bank of England would decide against an interest rate hike at the December policy meeting.

Global risk appetite remained strong on Tuesday with hopes that the Omicron variant would be less severe than Delta.

In this context, there was optimism that global growth conditions would remain supportive. Wall Street equities posted strong gains with a rebound in the tech sector. US bond yields moved higher during the day.

The dollar was unable to hold gains and posted net losses, especially against risk currencies. EUR/USD retreated to below 1.1250 amid a lack of yield support before recovering to post a marginal gain. Sterling was unable to gain any significant traction as BoE rate-hike expectations faded, but GBP/USD held above 2021 lows.

Commodity currencies posted strong gains as risk conditions dominated.

The German ZEW economic sentiment index retreated to 29.9 for December from 31.7 the previous month, although this was above market expectations of 25.1. There was, however, a steeper than expected slide in the current conditions’ component to -7.4 from 12.5 previously and well below forecasts of 5.0.

The Euro-zone expectations index improved marginally to 26.8 from 25.9 previously which provided an element of relief.

ECB council member Kazimir stated that it was important not to tinker with the APP bond-purchase programme. Fellow member Muller stated that it was not obvious that the central bank increase APP purchases beyond March given the high level of inflation.

The Euro was unable to secure support ahead of the New York open with the single currency edging lower amid expectations that Euro yields would remain very low over the medium term. Political rhetoric will be watched closely with German Chancellor Merkel officially leaving office on Wednesday.

Markets will remain on alert from hints over the outcome of next week’s ECB policy meeting, especially with the bank facing a high degree of uncertainty.

The US overall trade deficit narrowed to $67.1bn for October from a record $81.4bn the previous month as exports posted a strong gain to a record high on the month.

The Euro retracted further early in New York with a EUR/USD dip to lows just below 1.1230, but it stabilised towards the European close. Risk conditions remained an important driver with commodity currencies making net gains which also curbed dollar demand to some extent.

EUR/USD secured a net advance to 1.1290 on Wednesday as sellers were unable to push the single currency lower while the dollar failed to secure fresh support.

US Treasuries were little changed ahead of Tuesday’s New York open, but there was fresh selling pressure as US markets opened with the 10-year yield increasing to above 1.45%. Higher yields underpinned the dollar and equities made further strong headway with the strong tone surrounding risk appetite curbing potential defensive yen demand. In this environment, USD/JPY secured limited net gains to the 113.70 area.

Risk appetite continued to strengthen later in the session with hopes that the Omicron variant was less severe than the Delta variant, but there were still concerns that higher transmissibility would cause major problems for health services, especially given relatively low US vaccination rates.

There were no policy comments from Fed speakers with the blackout period remaining in force ahead of next week’s policy meeting.

The US currency held firm but was unable to advance further later in the session even with an extension in Wall Street gains.

Japan’s Tankan manufacturing index posted a 4-month high of 22 from 13 previously and the services-sector also recovered on the month. Asian equity markets posted net gains, although there were still reservations over the Chinese outlook and USD/JPY settled around 113.50 with EUR/JPY around 128.20.

Halifax reported an increase in house prices of 1.0% for November, slightly above consensus forecasts of a 0.8% increase, with the year-on-year increase unchanged at 8.2%. There was no significant impact with expectations that the data would not have an impact on monetary policy.

Sterling held firm into the New York open but was unable to make further headway despite robust risk conditions and GBP/USD was held below the 1.3300 level.

There were further expectations that the Bank of England would decide against an interest rate hike at the December policy meeting, primarily due to uncertainty over the Omicron variant. There were, however, also expectations of a hawkish policy statement which limited potential selling.

GBP/USD retreated to near 1.3200 while GBP/EUR settled close to 1.1700 after again finding support just below this level. There was a GBP/USD recovery to just above 1.3250 on Wednesday, although there were still reservations over domestic Omicron developments and EUR/GBP posted a net decline to 1.164.

Economic Calendar