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Sterling has started the year strong, being quick out of the blocks and reaching a two-year high against the Euro. It also rose to a two-month high against the Dollar and looks to continue this trend through the early hours of this morning. With a lack of restrictions from the UK government, and fears surrounding the Omicron variant fading, Sterling has managed to advance against most major currencies over the last month or so. With the GDP report for the UK out on Friday, the market expectation is at 0.4% growth in November 2021, with some analysts expecting this figure to be higher. However, since November we have had the Omicron variant come into play and therefore the Bank of England might not be looking at this data as a green flag to raise interest rates in February. Other important events for Sterling this week will include remarks from Catherine Mann, one of the latest additions to the BoE Monetary Policy Committee, who will be part of a panel discussion on Thursday.
Considering the majority of Europe entered 2022 amongst varying levels of lockdown restrictions, it proved to be the second-best performing currency in the first week of the year, falling just short to Sterling. However, it must be noted that Euro’s losses against Sterling were quite significant, losing over 0.61% a week to date, with many analysts saying it could fall further. During the latter stages of this week, European Central Bank President Christine Lagarde and Vice President Luis de Guindos will speak publicly at 13:30 on Friday and 10:30 on Thursday respectively. Otherwise, economic data is relatively quiet for the second week of the year, and it is likely these speeches, alongside Covid headlines, will dominate any major market movements. For the time being the ECB is delaying any interest rate hikes whilst the Bank of England and Fed Reserve have a more hawkish stance on the subject, with multiple rates rises expecting over the next 12 months.
The U.S. Dollar has slowed in its advance against many other major currencies in a possible further sign of fatigue following a strong six-month rally in advance of the now in progress normalisation of Federal Reserve monetary policy. The prospect of rising interest rates at the Federal Reserve had significantly contributed to an increasingly short stance on Sterling among investors and traders late last year. Markets also expect further hawkish commentary from Federal Reserve chair Jerome Powell as he testifies before the Senate this week, along with governor Lael Brainard, regarding their nominations. Meanwhile, the index dropped half a per cent in the previous session as the December jobs report missed expectations. On the other hand, the case of monetary tightening remained intact following hawkish minutes from the Feds December meeting, which indicated the central bank could reduce its balance sheet in addition to hiking interest rates. CPI figures are the main set of data releases for the US this week, which will give a good indication as to whether the Fed Reserve will raise interest rates or not.
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