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Sterling Recovers from Lows but Waits for the Bank of England’s (BoE) Gov Bailey’s comments

Yesterday, GBPUSD slid to a fresh low of the year following the comment from Federal Reserve (Fed) Chair Powell on speeding up the tapering of assets. Previously, the markets had reduced the probability of rate hikes in 2022 with the emergence of the Omicron variant. In the meantime, the Bank of England’s (BoE) Monetary Policy Committee (MPC) member Mann is speaking with the markets, keen to understand her assessment of the economy and more importantly the interest rate decision later this month. She stated that Omicron will trigger question marks over consumer confidence and could undermine demand for services. She also noted that inflation pressures could intensify, especially if there are renewed supply-chain issues. Mann went on to state that it is premature to talk about rate hikes let alone the magnitude of any rate increase highlighting that she did not suggest support for a near-term move to raise rates.

Given the uncertainty surrounding the Omicron variant, there is speculation that the BoE would decide against a rate increase in the policy meeting in December. This limited the support for the Sterling and caused its potential to hike to drop from 100% to 90%.

This morning, Nationwide’s House Price Index again reached double-digit figures last month. It recorded annual growth of 10% in November, up from 9.9% in October. Prices rose by 0.9% month-on-month (MoM), taking the average UK property value to £252,687.

Due to the increased uncertainty surrounding Omicron, the market will be keen to articulate BoE Gov Bailey’s stance and view on the path of interest rates with this new complication. Baily is due to deliver a speech titled “Delivering policyholder protection in insurance regulation” at the Institute and Faculty of Actuaries.

US Dollar Rallies on Hawkish Fed

The US Dollar rallied against a basket of currencies yesterday after Fed Chairman Jerome Powell indicated that the central bank could accelerate the pace of its efforts to boost the economy as it battles escalating inflation rates.

In comments made before the Senate Banking Committee, Powell said he thinks reducing the rate of monthly tapering can move more quickly than the current $15bn per month schedule. Powell further commented that the economy is very strong with higher inflationary pressures, therefore it is appropriate to consider wrapping up the tapering of asset purchases sooner which will be discussed in the meeting in December. Markets are now predicting that the tapering programme may conclude in the spring of next year, paving the way for earlier rate hikes.

US Stock markets fell sharply following the comments while government bond yields rose and the US Dollar traded close to one-year highs against the Pound. The markets are also awaiting the release of November’s ADP employment changes and ISM Manufacturing PMI ahead of key jobs data set for release on Friday.

Pressure is mounting on the European Central Bank (ECB)

Pressure is mounting on the ECB following the release of Eurozone headline CPI inflation figures which increased to 4.9% in November, considerably higher than the 4.5% forecast and 4.1% reading previously. ECB Chief Christine Lagarde insisted that the surge in inflation is a one-off but stripping back the volatile energy prices inflation remains above the ECB’s target at 2.6%. Currently, the Central Bank is expected to announce the end of its €1.85tn pandemic bond-buying programme in March 2022 but considering recent inflation surges, there are calls to end this sooner than expected.

Elsewhere, German unemployment fell by 34k in November exceeding forecasts of a 25k decline in the reading.  

Looking ahead to today, German Retail’s MoM sales showed a decline of -0.3%, surprising to the downside versus a 1.0% forecast. We also have the final manufacturing PMI due out this morning, the forecast is for an unchanged reading at 58.6.

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