• Audere Research

Weekly FX Outlook December 20th


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GB Pound


Sterling ended the week broadly unchanged despite the first rake hike in 3 years.


Movements

GBPUSD opened at 1.3235 and was quiet during the first half of the week before briefly spiking up to 1.3370 on Thursday following the BoE rate decision. It then gradually reversed the movement and closed at 1.3201, for a loss of 0.26%.

GBPEUR opened at 1.1749 and traded in a tight range all week, except for a short-lived spike above the 1.18 level on Thursday. It finally closed broadly unchanged at 1.1729 (-0.17%).


Movement rationale

With all eyes on the BoE interest rate decision later in the week, Sterling remained supported during the first few trading sessions, despite increasing concern over the new Covid variant. GBP advanced against major rivals on robust labour data, with the unemployment rate dropping marginally from 4.3% to 4.2% and, most importantly, UK CPI hitting the highest level in a decade at 5.1% y/y. The surprisingly steep jump in inflation put pressure on the Bank of England which decided to hike rates by 15bp despite the rising spread of the Omicron variant in the UK and recent cautionary messages regarding monetary policy. The market now expects some further modest rises in interest rates in the months ahead, to curb inflation down to the bank’s 2% target. The Pounds initially reacted by appreciated by more than 0.5% against peer currencies, before losing the momentum and progressively erasing all gains toward the end of the week as Omicron weighed on the currency.


Week ahead

With the run up to Christmas, we have a quiet week ahead in term of economic data releases. However, we could see some GBP volatility as the market becomes less liquid, with Covid news potentially weighting on the currency:


Calendar

Wednesday 7am | Gross Domestic Product (Q3)


US Dollar


The Dollar had a mixed week.


Movements

EURUSD opened at 1.1265 and after a caution start it traded lower, briefly touching 1.1220 on Wednesday. It then sharply recovered, reaching 1.1360 the next day before erasing all gains and finally closed the week largely where it started at 1.1255 (-0.09%).


GBPUSD opened at 1.3235 and was quiet during the first half of the week before briefly spiking up to 1.3370 on Thursday following the BoE rate decision. It then gradually reversed the movement and closed at 1.3201, for a loss of 0.26%.


Movement rationale

Omicron fears dominated the first half of the week in the currency markets. The dollar benefited from a deterioration in risk appetite, with markets seeking safer assets, and traded close to a one year and a half high against currency majors. The two-day US Federal Reserve meeting provided for further volatility: the Greenback initially rallied in response to hawkish Fed comments, announcing the end on the pandemic-era bond purchases by March and hinting at 3 rate hikes next year, but soon reversed the movement as investors reassessed the impact of the monetary policy shift.

Week ahead

A lighter economic agenda in US includes GDP data and durable goods. However, the US currency should more closely focus to any development related to the Omicron variant.


Calendar

Wednesday 1:30pm | Gross Domestic Product (Q3), Consumer Confidence (Dec)

Thursday 1:30pm | Durable Goods Orders (Nov), Michigan Consumer Sentiment Index (Dec)


Euro


Euro was firm.


Movements

EURUSD opened at 1.1265 and after a caution start it headed lower, briefly touching 1.1220 on Wednesday. It then sharply recovered, reaching 1.1360 the next day before erasing the gains and finally closed the week largely where it started at 1.1255 (-0.09%).

GBPEUR opened at 1.1749 and traded in a tight range all week, with the exception of the short-lived spike above the 1.18 level on Thursday. It finally closed broadly unchanged at 1.1729 -0.17%).


Movement rationale

The Euro-area was no exception to a week dominated by central bank meetings. However, there was no expectation of monetary policy change at Thursday's ECB meeting, so the Euro maintained a less volatile profile than most of its peers. The central bank raised its inflation forecasts for 2022 slightly higher and announced that the Pandemic Emergency Purchase Programme would end next March. Investors broadly interpreted the bank’s message more positive than initially anticipated, pushing the Euro slightly higher. ECB’s narrative was supported by the inflation data published on Friday, which saw the highest rate in the Euro-zone (at 4.9%) since the Euro was introduced. With UK and US starting progressively to hike rates, the divergence in monetary policy compared to the Euro-area is likely to maintain the single currency subdued in the medium term.


Week ahead

Given a quiet economic calendar this week, the Euro will likely be driven by market sentiment and Covid developments:


Calendar

Tuesday 3pm | Consumer Confidence (Dec)




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