EUR / USD
German unemployment declined 34,000 for November after 39,000 the previous month and larger than the expected decline of 25,000 with the labour market tight.
The Euro-zone headline CPI inflation rate increased to a record high of 4.9% for November from 4.1% previously and well above consensus forecasts of 4.5%. The underlying rate increased to 2.6% from 2.0%, above expectations of 2.3%, and the highest reading since February 2008.
The data provided an element of Euro support, although markets were still expecting that the ECB would push back against any pressure to raise interest rates. With the dollar generally on the defensive, the Euro strengthened to 10-day highs just above 1.1380 ahead of the New York open.
In testimony to Congress, Fed Chair Powell stated that the Fed’s inflation test has been clearly met and that the possibility of higher inflation has increased. He added that it is a good time to retire the term transitory in relation to inflation and that the Fed will use all the tools to make sure higher inflation does not become entrenched.
As far as monetary policy is concerned, Powell commented that it was reasonable to consider wrapping up tapering a few months earlier and the Fed will talk about speeding up the taper at the December meeting. On coronavirus, Powell stated that more would be known about the Omicron risks in the next week to 10 days.
The overall rhetoric was significantly more hawkish than expected, especially as markets had expected a more cautious tone given the Omicron uncertainties.
The dollar posted strong gains following the comments with the Euro dipping below the 1.1300 level. The US currency, however, was unable to sustain the advance and the Euro recovered to around 1.1335 on Wednesday as commodity currencies rebounded with markets continuing to watch Omicron headlines closely.
JPY
Risk conditions continued to be monitored closely with sentiment sapped by reports that antibody-drug treatments would be less effective against Omicron. After finding support close to 112.50, the dollar recovered from 7-week lows and stabilised early in New York.
US consumer confidence retreated to 109.5 for November from a revised 111.6 previously and the lowest reading since February with consumers also less confident over income and employment prospects. The Chicago PMI index retreated to a 9-month low of 61.8 for November from 68.4 while inflation pressures remained strong
The dollar posted strong gains following Powell’s comment with a spike to highs around 113.70. Long-term yields, however, retreated quickly and equities moved sharply lower. In this environment, the dollar retreated back to near 113.15 as the yen continued to secure defensive support.
Risk appetite recovered on Wednesday with some optimism that existing vaccines would be effective, although uncertainty remained intense. Chinese PMI data was slightly weaker than expected with the Caixin manufacturing index at 49.9 from 50.6 previously. Equities posted net gains and the dollar traded around 113.50.
GBP
Bank of England MPC member Mann stated that Omicron will trigger question marks over consumer confidence and could undermine demand for services. She also noted that inflation pressures could intensify, especially if there are renewed supply-chain issues. Mann added, however, that it is premature to talk about rate hikes let alone the magnitude of any rate increase which certainly did not suggest support for a near-term move to raise rates.
Given the uncertainty surrounding the Omicron variant, there was further speculation that the Bank of England would decide against a rate increase at the December policy meeting which limited Sterling support. The currency did gain brief support from a recovery in risk appetite, but equities tumbled again following Powell’s comments.
The UK currency slumped to fresh 2021 lows at 1.3200 before a recovery while the Euro strengthened to 2-week highs near 0.8540 before a retreat to 0.8525.
The firmer tone in risk appetite helped underpin Sterling on Wednesday with further very choppy trading continuing while the fresh push for aggressive vaccination also provided an element of relief. There was a recovery to around 1.3325 against the dollar in Europe while the Euro retreated to just above 0.8500.
CHF
The Swiss KOF business confidence index edged lower to 108.5 for November from a revised 110.2 previously and slightly below consensus forecasts. There was little impact with markets focussing on global risk conditions. The franc overall maintained a strong tone amid strong demand for defensive currencies.
The Euro was unable to sustain gains and briefly dipped to fresh 6-year lows before stabilising while the dollar dipped sharply to lows near 0.9160 before a recovery to 0.9200. The franc edged lower on Wednesday as risk appetite strengthened with the Euro around 1.0435 and the dollar holding close to 0.9200.
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