Sterling has made impressive gains against the majority of major currencies of late. GBP/EUR nearly breaching 1.20 during Wednesday’s trading. We went as high as 1.1997, the highest levels seen since February 2020.
Sterling has also made significant gains against the US Dollar, since late December we have seen a three cent movement from 1.32-1.35.
There have been two major catalysts for Sterling’s gains, the first of which being the Bank of England’s (BOE) stance on monetary policy. The BOE were amongst the first Central Banks to hike rates in order to combat high inflation. The move was bold considering other Central Banks have been labelling the worryingly high levels of inflation as transitionary. It was also the first time the BOE of hiked rates in December for 13 years. There was pretty strong justification at that point as well, the Lehman Brothers collapse.
There could be the possibility of further rate hikes moving forward which could further benefit the Pound. The European Central Bank (ECB) seem far less optimistic on the chance of rate hikes in 2022 and this does not bode well for the single currency.
The other catalyst is Boris Johnson’s reluctance to implement lock downs, he is sticking to plan B despite record numbers of infections of Covid-19. Lockdowns obviously have a serious impact on the economy and the fact that Boris is avoiding them has boosted investor confidence and in turn the pound.
Today we will see the release of December house price movement, there is expected to be a fall from 8.2% to 7.7% although I think you would have to see data land well away from expectations to see any serious damage for the pound.
We will also see the release of Construction Purchase Managers Index (PMI), this gives an indication as to the health of the construction sector. There is expected to be a drop from 55.5 to 54. Again, unless we see figures land away from expectations, I would not expect the data to have a considerable effect on Sterling.
Inflation Hits Record Highs
The Euro has had a rough start to the year losing ground against most major currencies, particularly the US Dollar and the pound. We have witnessed some of the weakest levels on EUR/USD since June 2020 and GBP/EUR is threatening to breach 1.20, a 22 month high.
The Omicron variant of Covid-19 is spreading at an alarming rate in the Eurozone and restrictions have been implemented across the bloc. This is of course damaging investor confidence and in turn the Euro. This coupled with high inflation concerns and a reluctance to combat inflation through monetary policy change from the European central Bank (ECB) does not bode well for the Euro.
Inflation has been an issue for the Eurozone for over a decade, struggling to stay around the healthy 2% mark. Inflation was low for several years, yet now the bloc suffers from levels of extreme inflation, now sitting at 4.9% the highest since records began.
The main contributing factor is the rapid rise in energy prices. Inflation could begin to eat away at wages and seriously hinder demand.
The Euro’s woes could be set to continue. Later today we will witness the release of Consumer Price Index (CPI) data. It is a measure of the changes in prices of goods and services and can have the clout to cause volatility on market. There is expected to be a fall from 4.9% to 4.7% which could cause a change in Euro value.
Following the CPI release we will see Retail Sales figures for December, there is expected to be a considerable fall from 0.2% to – 0.5% which could cause Euro weakness.
Federal Reserve Set For Multiple Rate Hikes
The Federal Open Market Committee (FOMC) announced on Wednesday that they were on board with plans to cut back on the current huge bond buying programme or Quantitative Easing (QE). QE is where a Central Bank will pump funds into an economy to stimulate growth. This will put the Federal Reserve in a better position to hike interest rates later in the year.
Chief US financial economist at Oxford Economics, Kathy Bostjancic, said the minutes displayed “rising discomfort with elevated inflation” among Federal Reserve representatives, who seemed to be confident that the US economy will recover despite the risk of the Omicron variant.
The Federal Reserve have indicated there will be three rate hikes this year, with three due next year and two in 2024. This could prove very beneficial for USD. Federal Reserve Governor, Christopher Waller has indicated there could be a rate hike as early as March.
The next data release of consequence will be released Wednesday 12th January. Consumer Price Index data is due to land. Consumer Price Index or CPI data shows the movement in process on goods and services. As a key measure of inflation and the current climate this could prove to have clout. Figures are expected to land at 0.5%, the same as the previous month, if data lands away from this prediction however, we could see volatility.
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