US Dollar Tumbles as Market Risk Appetite Returns

Pound (GBP) Strengthens as UK Economy Closer to Pre-Pandemic Level  

The Pound (GBP) firmed on Wednesday as the latest UK GDP data indicated the UK economy was 1.5% below pre-pandemic levels, rather than the 2.1% previously thought after the Office for National Statistics (ONS) revised its 2020 estimates to -9.4%, up from -9.7%. 

However, a downward revision to third quarter GDP growth to 1.1% from 1.3% limited Sterling strength, suggesting UK economic activity was weakening even before the Omicron variant hit. 

Optimism following real-world studies suggesting the Omicron variant causes milder symptoms than Delta may support the Pound today, although the prospect of restrictions after Christmas may limit Sterling.  

Euro (EUR) Buoyed by USD Weakness 

The Euro (EUR) made gains yesterday, benefitting from its negative correlation with the weakening US Dollar (USD). 

However, Germany and Portugal becoming the latest European countries to announce stricter Covid-19 restrictions capped EUR gains, with concerns growing over disruption to Eurozone economic activity. 

Looking ahead, in the absence of notable EUR data releases and increasingly thin trade before Christmas, movement in the Euro will likely remain driven by Covid-19 developments across the bloc. 

US Dollar (USD) Falls on Declining Safe-Haven Demand 

The US Dollar fell sharply across the board during yesterday’s session as a risk-on mood weighed heavily on demand for the safe-haven currency.  

Upwardly revised US GDP for the third quarter to 2.3% failed to support USD exchange rates, with the better-than-expected figure indicating a slowdown in growth from 6.7% in the second quarter. 

The Fed’s preferred measure of inflation, the PCE price index, and durable goods orders will be the main focus for USD investors today. Confirmation inflation soared again in November may support the ‘Greenback’ by reigniting inflation fears and souring market mood, while a return to growth in durable goods orders at 1.6% may provide further support. 

Canadian Dollar (CAD) Rebounds as Oil Prices Rise 

The oil-sensitive Canadian Dollar (CAD) fell through the early part of yesterday before improving market sentiment helped CAD rebound in the North American session as WTI crude prices strengthened to above $72 a barrel. 

Canadian GDP data for October released this afternoon may bolster the ‘Loonie’, with forecasts pointing to growth of 0.8%, up from 0.1% in September. 

Australian Dollar (AUD) Buoyed by Upbeat Mood 

After strengthening through yesterday’s European session, the Australian Dollar (AUD) built on its gains overnight on reports the Omicron variant poses a lower risk than other coronaviruses, which continued driving risk-on trade that benefitted the risk-sensitive ‘Aussie’. 

New Zealand Dollar (NZD) Jumps on Risk-On Trade 

The New Zealand Dollar (NZD) also benefitted from the upbeat market mood, with two real-world studies increasing hopes that the Omicron variant is less likely to hospitalise people than the Delta variant buoying risk appetite. 

Andrew Roberts

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