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Jamie Jemmeson
November 26, 2021

Risk-Off as New Variant Threatens

Risk off as new variant threatens.

The Sterling continues to be under pressure as tensions between the UK and France over Brexit continue. The French fishing sector is threatening to block access to the Channel tunnel and French ports as part of ongoing disputes over Brexit licences.

Bank of England (BoE) Governor Bailey stated that inflation expectations are becoming embedded and reiterated that the UK labour market is very tight. His tone suggested that the Bank is more likely to raise rates in December, although market conviction is lacking given that the November outcome with markets pricing is in a hike. In addition, there has been more dovish commentary from members.

Economic data continues to remain optimistic as the Confederation of British Industry’s (CBI) retail sales index strengthened from the previous month. However, in recent years sales started earlier and retailers remained optimistic over the outlook for December. There is a further increase in inflation pressures with selling prices increasing at the fastest pace since May 1990.

Equity markets fell significantly in Asia after a newly identified COVID-19 variant called B.1.1529 led to the UK banning flights from South Africa and five other neighbouring countries. The move is described as precautionary while scientists determine whether the new variant is more transmissible or lethal than the previous ones. Today the markets will focus on BoE’s Chief Economist Huw Pill who will talk about the economic outlook at a CBI event.

COVID-19 Restrictions Continue to Weigh on the Euro

The Euro remained under pressure against the US Dollar on Thursday, following decisions to impose stricter lockdowns across Europe. The fourth COVID-19 wave is impacting Europe severely and has seen Portugal announce new restrictions due to the rise in cases. Germany is expected to announce a decision on the matter on Friday as cases in the country currently stand at record high levels.

Meanwhile, the European Central Bank (ECB) continues to push back on tightening monetary policy, however, according to several governing council members, concerns are rising about the inflation outlook. There have been increased calls to shift monetary policy focus away from asset purchases to tightening rates. The latest Brexit negotiations yesterday reported that the French Fishing Association’s threatening to act ahead of the weekend. The association is expected to block French ports and the Channel tunnel, further disrupting supply chains that are already heavily plaguing the UK economy.

The economic calendar is light today with expectations that trading volumes across currency exchange markets will be subdued following Thanksgiving yesterday. Markets’ attention will turn to comments from ECB President Christine Lagarde who is scheduled to speak this morning.

Thanksgiving Holiday

Little happened across currency exchange markets on Thursday, as US markets were closed. Markets will work on shortened hours on Friday and muted trading is expected to continue.

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