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Sam Jones
December 16, 2021

Federal Reserve (Fed) Doubles its Taper Pace and Signals Rate Hikes in 2022

Sterling Remains Under Pressure Amidst Risk Off Tone

The Fed announced in the December meeting that it would end its pandemic bond support of the US economy in March – paving the way for 3 interest rate hikes in 2022. The Bank doubled the pace of tapering to $30 bn a month while noting that key risks will remain in the economic outlook due to Omicron uncertainties.

Policymakers cited persistent inflation, indicating that central bankers no longer view rising inflation as ‘transitory’ and that a recovery in the labour market is possible. They also projected 3 25 basis point rate hikes for 2022, up from the forecast in September’s dot plot. Following the press release, the US equity markets rallied given the positive tone and that the US Dollar Index ended the session slightly lower. 

Meanwhile, Fed Chair Powell noted that 2022’s Growth Domestic Product (GDP) forecasts have increased from 3.8% to 4%. However, 2023’s forecasts were lowered slightly to 2.3% from 2.5%.

It is set to be a busy day across the financial markets as investors await the announcements from central banks. Investors’ attention will also turn to the weekly initial jobless claims, the Philadelphia Fed Manufacturing Survey, and the industrial production data.

Will the Bank of England (BoE) Raise Rates amid Increasing Inflation and Omicron? 

The Sterling continues to strengthen after the inflation data showed the currency reaching the highest level in over a decade. The Consumer Price Index (CPI) inflation rate increased sharply from 4.2% to 5.1% for November – above consensus forecasts of 4.7% with the increase in core rate from 3.4% to 4.0%. This has sparked some speculation that the central bank could decide to make a move on interest rates today despite major uncertainties surrounding Omicron. Risk appetite, however, remains fragile which could impact potential support due to fears over Omicron.

The BoE will also provide policy updates today as the GDP data in October shows a disappointing growth of 0.1% and Omicron points to downside risks to Q4’s GDP growth. However, the data this week shows further strength in the labour market and a sharp rise in CPI inflation to 5.1%.

The surprising optimistic tone from the US central bank yesterday has added further weight to the BoE’s statement which may give some rationale behind its decision for policy action in 2022.

European Central Bank (ECB) to Drive Euro Direction Today

Euro activity remains range-bound yesterday following a second consecutive day of sparse economic data releases from the Eurozone. The only release on the calendar was the French Final CPI month-on-month (MoM) figures which remain unchanged from November’s reading of 0.4%, providing little direction for the Euro.

Today promises to be a much busier day for the Eurozone macroeconomic data, making the ECB monetary policy decision the focus this afternoon. Although it is widely expected that the ECB will not change interest rates from 0.00%, the surging European inflation and growing concerns over Omicron make for an interesting 2022 policy outlook. Given these factors, the central bank may require more time to analyse the possible impact of ending its Pandemic Emergency Purchasing Programme (PEPP) which was set up in March 2020 to support the Euro area. It is also due to end in March 2022 with a total value of €1.85 tn.

The markets will also be interested in the upcoming statement and policy outlook for 2022 as any hints on policy adjustment could provide a significant direction for the single currency.

We have a plethora of Purchasing Managers’ Index (PMI) data out today. The French Flash Services PMI is forecast to read at 55.9 down from a previous reading of 57.4 while the Manufacturing PMI is forecast to read at 55.4 versus 55.9. Both readings show a slight contraction in key French economic sectors but crucially remain above the key reading of 50.0. The German Flash Manufacturing PMI is also expected to read 57.0 versus a previous reading of 57.4, while the German Flash Services PMI is forecasted at 50.9 versus a previous figure of 52.7.

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