Pound fluctuates amid short-lived ‘Santa rally’

The pound wavered at the end of last week as the ‘Santa rally’ briefly bolstered market sentiment.

Sterling is broadly flat so far this morning, with GBP/EUR steady at €1.1312 and GBP/USD stable at $1.2046. GBP/CAD is rangebound at C$1.6285, while GBP/AUD and GBP/NZD retreat to AU$1.7805 and NZ$1.9093, respectively.

With data in short supply over the festive period, risk appetite could drive most movement in the currency markets.

What’s been happening?

The pound initially edged higher on Friday, recouping some of its heavy losses from the previous day, as an improving market mood lifted the increasingly risk sensitive UK currency.

Meanwhile, the euro was rather muted in the absence of any Eurozone economic data. The risk-on tilt in markets pressured common currency, but a weaker US dollar cushioned EUR due to the currencies’ negative trading correlation.

USD’s weakness came as a risk-on mood sapped support for the safe-haven ‘greenback’.

The US data releases in the afternoon failed to boost the US dollar. The Federal Reserve’ preferred measure of inflation, the core PCE price index, eased from 5% to 4.7%, while durable goods orders slumped by 2.1%.

However, the market mood soured as the session went on, tempering the pound’s gains and buoying USD.

What’s coming up?

Trading conditions could be thin this week due to a lack of economic data between Christmas and New Year. As a result, risk appetite could have a big impact on the pound, euro and US dollar. If market sentiment improves, the riskier pound will likely be the biggest beneficiary. If the mood deteriorates, the safe-haven ‘greenback’ could gain some ground.

Domestic UK news could also impact the pound. With industrial action intensifying and the government unlikely to make new pay offers, worries about the impact of strikes on the UK economy could hurt Sterling.

Meanwhile, any headlines around the Russia-Ukraine war could impact the euro. The common currency will likely decline if there are any indications that the conflict could escalate further in the new year.