Ben Fletcher
November 1, 2021

Could the UK Economy Return to a Pre-Pandemic State in Early 2022?

GBP

Recently the pound reached the strongest level in an 18-month period on GBP/EUR, with rates spiking to 1.19.

Yesterday, Chancellor of the Exchequer, Rishi Sunak announced the autumn budget and outlined his plans for the UK economy. Highlighting it will take until the start of 2022 before the economy will return to its pre pandemic state, confirming the national living wage will expand from £8.91 to £9.50 per hour. Sunak has also written to the Bank of England to re empathise its repeal on keeping a low and firm inflation.

Next week we should see the pound fluctuate again due to the Bank of England (BOE) meeting on the 4th November, the meeting will be held to discuss interest rates and the new policies they’ll be implementing. This will most definitely influence the pound over the coming months.

It is widely predicted that we will see a rate hike from the BOE. The market moves on rumour as well as fact, so it could be the case that the rate hike is currently factored into current market levels. There may not be any great shakes if the rate hike occurs. If, however, there is no rate hike then we could see volatility, as this is going against the grain.

Opposition politicians have joined forces for Boris to put stricter restrictions in place amidst the winter months, as cases are on the rise. With 36,567 positive cases in the UK up 2.2% from the week before. Another Lockdown could be on the cards. When comparing Covid cases to Spain & France the UK is more than 35,000 more. With cases continuing to rise, Boris will be forced to implement Plan B or another lockdown. Resulting in the economy slowing down again.

EUR

Later today the European Central Bank (ECB) will be meeting to discuss inflation figures and releasing its latest monetary policy at around 13:45pm. Eurozone inflation hit a 3.4 percent high in September and is predicted to reach a new high of 3.7 percent in October.

It is likely the new data will not have much change from the ECB’s already feeble stance. Once the monetary decisions have been published Christine Lagarde the President of the ECB will be holding a press conference at 14:30pm to discuss the decisions made. It is likely Investors will hang on to Lagarde’s words surrounding the decision, this could bring about some volatility to the EUR.

It is most likely the ECB will wait until December to make a firm decision or make drastic changes on anything. If, however, there is a shock decision, expect market movement. The inflation figures have risen rapidly, it is highly possible however this is due to recent easings of Covid lockdowns and an increase in public spending. It is also important to realise goods and materials are far more expensive when imported. For example, building materials from China, have seen a huge increase in price. Based on this, is a rate hike really justified?

On Friday we are expecting the release of French Gross Domestic Product (GDP), as one of the largest economies in the bloc this release does have clout. There is expected to be an increase from 1.1% to 2.1% which could benefit the euro if data lands away from expectations, we could see swings in EUR value.

USD

The Federal Reserve (FED) to meet in November to discuss reducing/phasing out the stimulus program by June’22, whilst the programme is running the FED will be able to guage a better idea on how the economy will handle this after Covid. Should the economy move as anticipated, we may not see a sudden hike in interest rates.

Federal Reserve Chairman, Jerome Powell, had said “I do think it’s time to taper, and don’t think its time to raise rates” during an online conversation last week. The jump up in vaccination rates and Fed approved spending have helped the US economy get back on its feet, (excluding the soaring food and energy prices).

Later today the US Bureau of Economic Analysis is set to release the GDP report for Q3, there have been rumours that the policymakers will not change their narrowing outlook. The US economy is expected to grow by 2.5% in the next year, after growing by 6.7% in the previous quarter. This could bring about some volatility for the USD.

The pandemic had a negative impact on consumer activity and continued supply issues within manufacturing sector. This should show itself in the GDP report.

This week we also saw reports that American Citizens had lost confidence in Biden’s ability to save the US economy after the pandemic as inflation surges to 5.4% which is 13 year high for the US. This dip could obstruct Biden’s ability to lead the Democrats. This could also sway the USD rates.

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