IFX Market Report: Wednesday 12th January 2022

The Pound advanced on Tuesday against both the Euro and Dollar, supported by the markets “expectations that the Bank of England will raise interest rates further”. GBPEUR was able to trade close to 23-month highs in the session and dropped off slightly by the close. One of the main reasons for this spike is the divergence in central bank policy. Following the BoE’s surprise rate hike last month, investors are becoming increasingly confident that the UK will raise rates at its next meeting. The European Central Bank in contrast “looks as though it will stay its current course of patience and caution”. At the EBC’s December meeting, President Christine Lagarde said that hiking rates in the Eurozone would be “very unlikely” as it “would choke the growth we are seeing”. Lagarde has consistently reiterated that she believes inflation “will decline over the course of 2022, and we see it going towards” the ECB’s “target in the course of 2022”.

The Dollar traded rather flat on Tuesday as investors awaited Fed Chair Jerome Powell’s testimony at 15:00. The Greenback dropped lower after Powell “noted that policymakers were still debating approaches to reducing the fed's balance sheet, and said it could sometimes take two, three or four meetings for them to make such decisions”. Overall, Powell’s “message on Tuesday was less hawkish than some investors had expected”.

After opening yesterday at 1.3611, GBPUSD closed not far off, finishing the session at 1.3617.

GBPEUR experienced another volatile session on Tuesday. The pair opened at 1.1992 and closed at 1.1983 but touched as high as 1.2013 in the late morning.

EURUSD opened at 1.1349 and closed 12 pips above at 1.1361.

On the data front, at 10:00 the Eurozone will release November’s Industrial Production YoY. At 13:30, US Core Inflation Rate YoY and Inflation Rate YoY for December will both be published. Then at 18:00 Fed member Kashkari will be giving a speech, followed by the US’ December Monthly Budget Statement.

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