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Bank of England (BoE) Rate Hike Opens the Possibility for Future Hikes in 2022

Yesterday, the market was focused on the key meeting where the BoE decided to increase interest rates from 0.15% to 0.25%. Although there was speculation over a rate hike, the consensus is for the Bank to wait until February due to Omicron uncertainties, highlighting that the elevated inflation pressures are more of a concern to the economy. It is expected that inflation will rise to 6% early next year. 

Sterling also jumped higher amid reservations over Omicron developments. The market expects a potential scenario where the BoE may raise rates three times in 2022. 

The pressures on Prime Minister (PM) Johnson continue to increase as the government lost a key by-election but there are reports of a more conciliatory stance on the Northern Ireland Protocol. The effects of the Conservative rebellion, soaring opinion polls, and the loss of a by-election make a leadership battle more plausible, however.

This morning the retail sales data is stronger than expected with a 1.4% increase, contrary to the expectations for December.

US Dollar Weakens from recent Highs as Risk Appetite Increases

US Dollar weakened on Thursday as risk sentiments boosted global equities following the Federal Reserve’s (Fed) announcement to end the pandemic-era support in March 2022.

It has been a busy week with economists digesting the latest policy announcements from several central banks such as the BoE and the European Central Bank (ECB) voting for tighter policies in response to rising global inflationary pressures. Meanwhile, the US Dollar may continue to gain short-term support as multiple countries report new COVID-19 cases.

It is a quiet day on the economic calendar today as the markets continue to grasp the implications of policy changes. Fed member Waller is scheduled to speak this afternoon and investors will look for further comments on the Fed’s tightening of monetary policy.

Elsewhere, the monthly option is due around this month which may create some short-term volatility with liquidity levels suppressed ahead of the festive period.

Markets Decipher Possible 2022 ECB Rate Hikes

The ECB voted to leave interest rates unchanged at 0.0% in line with market expectations during yesterday’s monetary policy meeting. The ECB announced that the Pandemic Emergency Purchasing Programme (PEPP) would end in March 2022, consistent with the Central Bank’s previous rhetoric. However, the Asset Purchasing Programme (APP) will be increased by €30 bn in Q2 2022, before reducing it to €20 bn in Q3-Q4 respectively.

The inflation outlook was also closely monitored for hints on future rate adjustments. The Central Bank revised its 2022 inflation outlook to 3.2% – dramatically up from the 1.7% forecast in September. As a result, the Euro found some direction increasing it sharply as markets deciphered the possibility of a potential rate hike next year.

Elsewhere, the Eurozone Flash Manufacturing Purchasing Managers’ Index (PMI) read slightly above the forecast at 58.0 versus an expected reading of 57.8. The Eurozone Flash Services PMI read below the forecast at 53.3 versus an expectation of 54.2, however.

Looking ahead to today, there is very little in the way of key Eurozone data. The German IFO Business Climate Index is due this afternoon and the sentiments are expected to slip off marginally from 96.5 to 95.3.

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