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Will the Bank of England (BoE) Officials Still Support a December Hike amid the Omicron Variant?

Sterling continued to fluctuate within a tight range as the market continues to decipher the potential impact of the new COVID-19 strain. One potential scenario is that growth will be impacted and therefore doubts have emerged as to whether the BoE will push ahead with an interest rate hike in December, amid the increased uncertainty triggered by the new Omicron variant. This has further impacted the currency’s ability to gain support.

In terms of economic data, UK mortgage approvals declined below consensus forecasts with a sharp overall slowdown in mortgage lending to £1.6bn; however, this is not uncommon for this time of the year. The Lloyds’ Business Barometer this November, which has been released overnight, edged lower for the second month in a row. However, the decline was a modest 3 points, leaving the headline reading still well above levels earlier this year and its long-run average.

Looking to the day ahead, BoE policymaker Mann is set to speak this afternoon. Mann voted to leave interest rates unchanged in November, but she has also called for an early end to the Quantitative Easing (QE) programme. Mann has indicated that she favours a modest rise in interest rates in the coming months, however, given recent developments on the virus it will be interesting to understand whether she would support a December hike.

Federal Reserve (Fed) Chair Powell Cites Downside Risks to Employment and Economic Activity due to the Omicron Variant

The US Dollar ended the day on the back foot against a basket of major currencies following a fall in the US Treasury bond yields and investors’ balanced concerns over the Omicron variant. Meanwhile, Atalanta Fed President Raphael Bostic was the latest of several Fed officials to indicate that the pace of the Fed’s stimulus tapering programme may need to accelerate in response to elevated inflation rates and increased momentum in the economy. Fed Chair Jerome Powell yesterday told the US congress that the Omicron variant poses a threat to the economy, highlighting downside risks to employment, and economic activity.

Fed Chair Powell is due to testify before the US Senate Committee on Banking, Housing, and Urban Affairs this afternoon. Powell is expected to comment that inflationary pressures are expected to remain heading into 2022. A relatively light economic calendar today and markets will look to tomorrow’s ISM Manufacturing Data, which is the first of several significant data releases later this week.

German Inflation Highest since Mid-1992

German CPI Inflation exceeded consensus yesterday, reading 5.2% for November versus 4.5% the previous month and a consensus figure of 5.0%. The Harmonised Indices of Consumer Prices (HICP) rate increased to 6.0% representing the highest figure since the inflation measure started. One might expect this to increase pressure on the European Central Bank (ECB) to adjust monetary policy in the near term, however, the Central Bank has looked to calm markets by suggesting several one-off causes such as soaring energy prices. The supply-chain issues will also retreat next year.

In addition to the above, we also saw Eurozone industrial sentiment fall from 14.2 in October to 14.1 this month while services sentiment increased from 18.0 to 18.4 in November.

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