Jamie Jemmeson
December 20, 2021

Sterling Loses Ground despite Hike as Uncertainty Increases

Last week the focus was on the Bank of England (BoE) meeting, where interest rates were increased from 0.15% to 0.25%. The consensus is for the Bank to wait until February due to ongoing Omicron uncertainties, highlighting that the elevated inflation pressures are a concern to the economy. It is expected that inflation will rise to 6% early next year. The Sterling also jumped higher and the markets still expect the BoE to raise rates three times in 2022.

The internal protest from the Conservative Party adds to the pressure that Boris Johnson is facing as the prime minister. This was further compounded by Lord Frost’s resignation as Brexit minister, making Prime Minister (PM) Johnson’s leadership and tenure questionable.

With Christmas drawing nearer it will be very quiet in terms of economic data. The most interesting release in the UK is the Lloyds Business Barometer for December. The recent monthly readings have also shown overall business confidence holding up relatively well despite ongoing concerns about supply-side constraints and pickup in COVID-19 cases.

Lockdowns and the Path for a Rate Hike 

The market’s focus was on the ECB last week. The European Central Bank (ECB) voted to leave interest rates unchanged at 0.0% in line with market expectations during yesterday’s monetary policy meeting. The Central Bank announced that the Pandemic Emergency Purchasing Programme (PEPP) would end in March 2022, consistent with their previous rhetoric. However, the Asset Purchasing Programme will now be increased to €30 bn in Q22022 before reducing it to €20 bn in Q3-Q4 respectively.

The ECB’s inflation outlook was closely monitored for any hint towards future rate adjustments and recently 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.

The week ahead is quiet; however, the market will continue to watch Omicron developments as the Netherlands imposed lockdown last week.

Greenback Remains Well Supported Following Central Bank’s Policy Announcements

The US Dollar closed well supported last week against major currencies. It was a busy week with economists digesting the latest policy announcements from several central banks. The greenback initially weakened following the Federal Reserve’s (Fed) announcement to end the pandemic-era support in March 2022. 

The market’s reaction to the announcement was an increase in risk sentiments which saw global equities markets rallying higher and the US Dollar Index dropping lower from recent highs. Following the Fed’s announcement, the BoE and the European Central Bank (ECB) voted for tighter policies in response to rising global inflationary pressures. The Dollar also continued to attract support later in the week as multiple countries continue to report new COVID-19 cases and tighter restrictions relating to Omicron.

With most of the major central bank policy announcements now out of the way, risk appetite is dominating the financial markets leading up to the festive period. The continued surging cases of Omicron globally have triggered a flight to safe-haven assets.

There are no high-impacting data releases set for release this week and therefore the direction of the US Dollar is likely to be driven by the headlines surrounding COVID-19.

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