Sterling held a firm tone into Wednesday’s New York open with underlying support from higher money-market yields while risk conditions were little changed. Prime Minister Johnson confirmed that there wouldn’t be further tightening of coronavirus restrictions in England and no need for further lockdown measures. There was an element of optimism that high immunity levels through infections and vaccination boosters would help curb the spike in cases. In this environment, there was speculation that the UK economy could out-perform the Euro-zone. There were further gains for UK equities which helped underpin Sterling confidence during the day. Sterling retreated against the dollar after the Fed minutes, especially with a slide in risk appetite, but it held a firm overall tone. There was a further net retreat on Thursday as risk appetite remained vulnerable.
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The Euro-zone services index was revised down to 53.1 for the final reading from the flash reading of 53.3 with both the Italian and Spanish readings below expectations, although both were in comfortable expansion territory while the German sector remained in contraction. ECB council member Kazaks stated that an interest rate increase was possible in early 2023 and that the central bank is ready to cut policy stimulus if necessary.
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13.00 German Harmonised Index of Consumer Prices (YoY) (Dec) Exp. 5.7% Prev. 6%
ADP reported an increase in private-sector payrolls of 807,000 for December from a revised 505,000 the previous month. The increase was more than double consensus forecasts of 400,000 and the strongest reading for seven months. The data boosted confidence in the labour market ahead of Friday’s employment report. The dollar secured only brief support from the stronger than expected jobs data and dipped lower after the Wall Street open. Minutes from December’s Federal Reserve meeting indicated that inflation concerns had increased. Most participants also considered that prerequisites for a rate hike could be met relatively soon if the recent pace of labour-market improvement continued. There was still a wide range of views and some members considered that structural deflation pressures could return. The overall tone was, however, hawkish and there was a shift in money markets with futures pricing in an 80% chance of a rate hike at the March meeting.
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15.00 ISM Services PMI (Dec) Exp. 66.9 Prev. 69.1