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In our final FX review of the year, we talk through the positive risk sentiment that poured through markets in the shortened trading week. Aside from this, we also start to consider what January could have in store for us all.

Improving risk helping GBP, AUD

After the busy week of central bank meetings, we headed into this week looking for a calmer finish to the year. This was mainly correct, with G10 realised volatility falling. Within the majors, GBP was the stand out performer. We note two key reasons for this.

Firstly, UK GDP on Wednesday beat expectations, coming in at 6.8% YoY vs 6.6% expected. Given that this reading had a fair amount of risk to the downside, a beat was especially pleasing. Secondly, improving risk sentiment saw investors move back into higher beta currencies such as the Pound. When we consider that GBP/USD was flagging as oversold on dips below 1.3200, the relief rally to close around 1.3400 on Friday wasn’t too hard to conjure up.

With equities rallying across the board, better sentiment meant that the USD struggled to post gains. One of the trades of the week would have been getting long AUD/USD, playing this sentiment mood that saw the pair close at 0.7220, up easily over one big figure on the week.

The only notable exclusion to the party was the Euro. EUR/USD meandered around the 1.1300 level, but lacked any conviction to take advantage of the USD weakness. We put this down to the funding element of EUR. With investors happy to take on more risk, taking cheap funding in EUR and selling it into AUD or GBP was likely in high demand last week.

Looking to 2022

Even though some look to the new year as a clean break from 2021, this isn’t the view of the financial markets. The risks certainly carry through to January with respects to inflation, Omicron and supply chain disruption.

Add into the mix heightened tensions with Russia, along with a potential China slowdown, and FX markets will have a lot to contend with in Q1 next year. Fortunately, with FX you can pick and choose your battles. For example, the Russian Ruble (RUB) is very volatile, so making a direct play on political tensions here is risky. Yet taking on a safe haven play via CHF or JPY if we see war break out with Ukraine should still yield profit, but in a much more measured way.

The first week of January usually starts as calmly as the end of December, but don’t be lulled into a false sense of security. US inflation on January 12th marks the start of a busy few days of data releases, and one that will need all of us to be back on our game.

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