GBP
The pound moved lower yesterday and remains more than two cents beneath the 20-month high for GBP vs EUR following an eventful last week with a UK interest rate hike and nervousness over the Omicron variant. Despite the decision by the Bank of England to raise interest rates to 0.25% the pound struggled to maintain the higher ground following a very short-lived spike immediately after the announcement.
The Bank of England’s chief economist has acknowledged there could be a lot more interest rate hikes to come. He has stated that he is “very uncomfortable” with the high level of inflation currently sitting at 5.1%. The forecast from the central bank is that inflation will hit a high of 6% in April 2022. The FT reports that the central bank had received information that companies have been making plans to raise both prices and wages.
Meanwhile Omicron continues to make the headlines with 91,473 confirmed Covid cases reported on Monday. At the moment it is unclear how severe the new variant of coronavirus will be and it is impossible to predict when the peak of this wave will happen.
As the FT reports, Professor Azra Ghani at Imperial College London has signalled that such a high infection rate could result in “a large number of people requiring hospitalisation.” Reports are emerging of further restrictions and even a potential lockdown early in the New Year once the festive period has gone ahead. Markets will naturally speculate on what this could mean for the economy and its growth projections which are likely to influence sterling exchange rates.
For the moment the markets await further data although it is clear there is a vast spike in Omicron cases in London. At yesterday’s UK press conference Prime Minister Boris Johnson stated that the arguments for tighter restrictions are “finely balanced” and that “we will have to reserve the possibility of taking further action to protect the public.” NHS staff sickness may have some bearing on any outcomes in the coming days and weeks.
UK Gross Domestic Product numbers will be released on Wednesday morning and may impact on Sterling exchange rates in the week before Christmas.
EUR
For several months, the European Central Bank (ECB) has turned a blind eye to rising inflation while insisting that the spike in prices will be transitory. This view changed last Thursday when even the ECB offered some caution on its view on inflation and stated it would scale back its pandemic bond purchases. Whilst the ECB may not be described as hawkish, it was certainly less dovish in its outlook. There has now been a global shift in central banks thinking and a realisation that global demand is outstripping what the world is able to supply in terms of goods and services. This concept is driving prices higher and with another wave of covid here this winter it is only going to exacerbate these issues.
For the moment the ECB is not yet committing to any rise in interest rates soon, but it is apparent that there is a debate about inflation within the bank. It may only be a matter of time before the ECB is forced to change tact and follow in the footsteps of the Fed and Bank of England.
The Netherlands has reintroduced a full lockdown until 14th January due to the fifth covid wave whilst France, Austria and Cyprus have all introduced travel restrictions. With fears that the Omicron variant will spread over the festive period there may be other full lockdowns from individual EU countries as EU countries’ approaches differ.
European consumer confidence data is released this evening and may offer some sentiment as to how consumers view the current situation.
USD
The covid story in the US is familiar with cases rising rapidly and with a particular spike in New York which has become the epicentre with cases doubling. The Omicron variant is expected to become the dominant strain in the coming weeks. President Biden is expected to be speaking later today on the next steps for dealing with this new wave. He is not expected to move to a full lockdown although any measures to tackle the new variant could result in market movement for the dollar. According to one of the most severe projections, the virus could reach more than 500,000 cases by the end of January. Expect more volatility in the weeks ahead as Covid continues to be a major driver for dollar exchange rates.
The US Federal Reserve is another central bank which has suddenly become more hawkish on inflation and interest rates. The Fed has hinted that there will be three interest rate hikes in 2022 with levels sitting between 0.75% and 1%. As those 2022 rate decisions approach the dollar is likely to find support on such expectations as investors consider moving funds into what is to become a higher yielding dollar.
US Gross Domestic Product data will be released on Wednesday and may offer some clues as to the overall health of the world’s biggest economy.
The Dollar could see an interesting end to the week with several US economic releases announced on Thursday including US jobless claims and new home sales.
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