In comments on Friday, Bank of England chief economist Pill stated that the central bank will need to increase interest rates further if inflation persists and that domestically generated inflation pressures are likely to be more persistent. Pill acknowledged risks associated with Omicron, but also noted that there are two-sided risks given that supply-side disruptions would put further upward pressure on inflation, although labour-market trends will also be watched closely. Sterling again failed to gain wider support with sentiment hampered by generally weaker risk appetite and unease surrounding Omicron developments. CFTC data recorded an increase in short Sterling contracts to over 50,000 contracts from 38,000 previously and the largest short position for over two years. Over the weekend, Brexit Minister Frost resigned, reinforcing internal tensions within the government, although Truss could be seen as a safe pair of hands.
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The German IFO business confidence index retreated to 94.7 for December from 96.6 the previous month and below consensus forecasts of 95.3. The current conditions index dipped to 96.9 from 99.0 in November with the expectations component retreating to 92. 6 from 94.2 with both figures below market expectations. The IFO commented that consumer-facing businesses have suffered a drop in business while raw material and supply-side difficulties have got worse with widespread price increases. The Euro was hampered by the data and unable to make any headway ahead of the New York open. Following the central bank policy meetings this month, there were still strong expectations that yield spreads would favour the US dollar. There were also further concerns over the damaging impact of very high gas prices on the Euro-zone economy with pre-weekend position adjustment a significant factor.
The Euro dipped and continued to lose ground later in the session with some negative impact from Russia-Ukraine tensions.
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Fed Governor Waller stated that inflation was alarmingly high and that a rate hike will be warranted shortly after the taper ends. He added that the whole point of the faster taper was to make March a live meeting and that his base case was that a March hike is very likely. The dollar posted further net gains. San Francisco Fed President Daly stated that she was keeping an open mind about how many rate hikes there will be next year. Trading volumes will gradually decline during the week ahead of the holiday period and position adjustment is liable to contribute to choppy trading.
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