Overnight Headlines

*China factory inflation slows in November from 26-year high

*Asian markets follow Wall Street with gains, Nikkei slips

*Oil extends Omicron relief rally with demand concerns easing  

*Dollar slides after touching a one-week high, 10-year Treasury yields are back above 1.5%

USD closed 0.4% lower as better risk sentiment again saw high-yielding commodity currencies outperform. AUD is currently trading above September resistance at 0.7170 and NZD above the August low at 0.6805. GBP was soft and posted a new y-t-d low at 1.3160 as the UK went to “Plan B” with more Covid restrictions. EUR/GBP hit its highest in more than two months at 0.8599 as EUR/USD pushed above 1.13.

US equities closed higher as investors continued to hope the impact of the Omicron variant would not be as bad as initially thought. The Dow reversed higher near the end of the session as healthcare outperformed. The S&P500 now sits just 0.9% from its record. Asian markets are mixed this morning. European futures are mildly in the green while US futures are mixed.

Market Thoughts – Lockdown-lite rattles UK rate rise

GBP dipped to a new 2021 low against the dollar at one point yesterday as expectations that the Bank of England will raise interest rates next week waned. New “Plan B” restrictions have been put in place by the UK government to slow the spread of the emergent Omicron variant. These include a mandate to work from home and the use of a vaccine passport at large events.

Money markets now assign a near 40% chance of a 15bp rate move next Thursday. This is down from 60% before the news and a near 70% chance two weeks ago. Recent speak from BoE officials has also been more dovish with Deputy Governor Broadbent playing down the odds of a rate hike. The degree of infectiousness is worrying scientists and the new measures will hit the services and leisure sectors hard at their busiest time of year.

Chart of the Day – EUR/GBP breaks resistance

Bullish momentum has picked up sharply since EUR/GBP made new eight-month lows at 0.8380 just a few weeks ago. Prices consolidated around the previous October low at 0.84 before pushing higher back above the 50-day SMA.

After three strong days late last month, the pair then paused around the 100-day SMA at 0.85. Trendline resistance from the December high also halted more upside, as it had done in September and November. The bullish burst yesterday has taken us through that trendline and the 200-day SMA. Bulls will aim for a strong close to the week around 0.8594, before eyeing up the pivot high at 0.8658. Initial support is the 200-day SMA at 0.8555.