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GBP leads the way as risk taking pulls back

January 05,2022 07:38:22

Overnight Headlines

*Chinese banks cut traditional lending as concerns over economy mount

*US manufacturing cools but globally, factories take Omicron in their stride

*Asian shares skid as rising US yields hit tech stocks

*Goldman and ANZ strategists bet on tourism-linked currencies in recovery

USD was mixed against its peers as the DXY closed marginally higher. Most strength was seen versus the yen with USD/JPY rising to 116.35, its highest in nearly five years. US 10-year Treasury yields hit a high of 1.69%. EUR trades around 1.13 but the pound rebounded with cable above 1.35 and EUR/GBP sinking to a low of 0.8332 overnight. AUD and NZD also rallied, the former round the 50-day SMA at 0.7232 and the kiwi around the August low at 0.6805.

US equities had a mixed session with industrials pushing the Dow to a new record high (+0.6%) while the broader market retreated with the S&P500 lower (-0.1%). The Nasdaq (-1.3%) was weighed down by the fall in tech stocks with higher interest rates potentially hurting profits. Asian markets are mostly lower with Chinese tech shares suffering. Futures are modestly in the red.

Market Thoughts –Data signals

It was quite a rollercoaster session yesterday with major dispersion between regions and sectors in equity markets. The yen is wallowing as Omicron fears subside and Fed rate hikes loom. Meanwhile, oil pushed higher as OPEC+ agreed its output increase though surging US stockpiles raise demand concerns.

The first major data of the year was released with US ISM disappointing. But it was notable that the prices paid component fell sharply while new orders signalled relatively strong demand. (Easing) price pressures are a key market driver and will be seized upon if this trend continues. We get the US ADP jobs report this afternoon ahead of Friday’s NFP. Tonight’s FOMC minutes will be scoured to see if they show any detail on the timing of the first rate hike.

Chart of the Day – Sterling the leading major so far

GBP finished last year off strongly and is continuing its drive higher this week. The UK government’s tactics on mild social restrictions (compared to continental Europe) seem to be paying off. Markets are reacting by pricing in a higher probability of another BoE rate hike at its next meeting in February. Roughly 20bps are priced in with another 80bps+ for the rest of the year.

Cable climbed strongly through mid to late-December with a rounding bottom in play around 1.32. Prices pushed above resistance at the October low at 1.3411 and the 50-day SMA. The major is now consolidating with next resistance at 1.3555 and then the July low at 1.3572.

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