Speculation surrounding an interest rate hike in the UK once again sparked a frenzy for the GBP/EUR as the inter-bank rate climbed over 1.19 taking us to a 2021 high and on par with rates last seen in February 2020. The speed in which the rate rise has happened took some by surprise however, it appears that the release on Wednesday for wage growth and unemployment data, coupled with above-expected inflation levels yesterday has been the catalyst.
The Bank of England (BoE) failed to raise the interest rate at their last Monetary Policy Decision meeting on 4 November, when many had expected they would. In the run-up to the 4 November, GBP/EUR tumbled from 1.19 down to 1.165 as optimism for a hike subdued. However, two weeks is a long time in the world of currency, and following this week’s data we find ourselves with markets anticipating an interest rate hike at the 16 December BoE meeting. The bank doesn’t normally raise interest rates in December, with the last time being in 2008 when the financial crisis was taking place.
The Bank of England Governor, Andrew Bailey, told MP’s at the Commons Treasury Select committee that he came very close to voting for a hike, but didn’t this time. He emphasised the BoE is here to stabilise prices and was concerned about the rising cost of living. There are some concerns surrounding real wage growth and that many of the pay rises we have seen are down to labour shortages following visa changes. There will be more economic data releases before the next interest rate decision, so those should be keenly watched for any hints of what the bank might look to do.
Concerns surrounding Coronavirus across Europe are back with fears of lockdowns appearing across the continent. In Austria, they have already taken the step to lockdown unvaccinated people, with police searches taking place on the streets making sure rules are adhered to. Austria is the only country so far to have introduced extreme measures but with rising cases across the continent, there are worries others may start to follow. Several countries including Germany are currently on par with their peak daily infections, with some calling for stronger measures to curb infections, the UK is currently at 63% of its peak infections.
In the run-up to Christmas, mixing families may once again be at risk with German Chancellor Angela Merkel having a crisis meeting with regional leaders. Merkel suggests Germany was in a “dramatic” grip of a 4th wave with some form of measures set to be introduced. The Chancellor also encourages people to take the option of the booster jabs, as well as suggesting it was not too late to get the first vaccination.
From an economic standpoint, the Eurozone is steadily increasing with GDP growth of 2.2% for the third quarter, this was in line with expectations. It does suggest that the Eurozone is on a steady path, however, any disruption once more from Covid could well start to take effect once again. The end of the week is quiet from a data perspective from the Eurozone, however, European Central Bank (ECB) President, Christine Lagarde, will speak on Friday and may provide an insight into the ECB’s plans moving forward.
The US Dollar is going from strength to strength at the moment with the US Dollar Index (a measure against the 6 main global currencies) currently at a 16-month high. The GBP/USD has found itself in the low 1.30’s which is nearly 10 cents below the 1.42 high seen earlier in the year. The US economy, much like the UK, has been doing well since the pandemic, and talk of interest hikes is a key topic. The US Federal Reserve, only a few weeks ago, suggested their quantitative easing program was going to come to an end in the middle of next year which shows they’re optimistic for the future.
However, Federal Reserve Chairman Jerome Powell, earlier this year, suggested they would not be looking to raise interest rates until 2023. In line with most economies around the globe, the fast rises in inflation may well force an interest rate hike to be on the cards before then. If anything, there is a strong chance there could be several in one year which we have seen before in the US, as recently as 2018 when there were four.
The US Dollar has also found itself strengthening against the Euro as well, with the EUR/USD rate in the low 1.13’s which is the lowest level since July 2020. There is potentially a chance for further movement with the US economy on a positive trend and the EU under threat from a rise in Covid cases. The end of the week is quite quiet for US data however that can’t be said for next week with the Federal Open Market Committee meeting minutes due on Wednesday. These will be eagerly anticipated in order to understand the plans of the Federal Reserve in the near future.
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