Tom Holian
January 11, 2022

GBP- Sterling close to 2 year high vs the Euro

The Pound has continued to remain in a very tight range against the Euro and close to a 2 year high to buy Euros with Sterling at the moment. The Pound endured a difficult time at the start of 2021 owing to the finalisation of Brexit combined with Covid 19 but has, in the last 12 months, looked a lot stronger particularly vs the single currency.

Although Omicron appears to have caused case numbers to rocket to record numbers there has been no lockdown of the English economy and arguably this has been one of the key reasons why Sterling has found so much support.

With the economy being allowed to stay open compared to some countries in Europe this has helped the Pound to strengthen.

UK inflation also continues to remain much higher than the target and this has caused the Bank of England to already hike interest rates in December.

With the next meeting due to take place in February, could we see another rate hike in order to combat rising inflation?

If we do see another hike based on general economic theory this tends to strengthen the currency involved and therefore we could see further support for the Pound if we see another rate hike at the next monetary policy meeting due next month.

The one sticking problem for the UK is that of the current isolation period as the current amount of time is causing staff shortages in a wide variety of different industries including the NHS. Therefore, this is one of the only reasons why we may see some form of lockdown. However, as the government did not do anything before Christmas nor New Year it would come as a surprise to see any change at the moment.

EUR – Euro under pressure owing to lockdown & monetary policy

The Euro has continued to struggle against the Pound hitting close to its lowest level in 2 years as problems persist on the continent. Eurozone inflation like the UK & US continues to remain much higher than the target with recent figures showing over 5%.

This is likely to put pressure on the European Central Bank to consider changing monetary policy but at this point there has been little suggestion of any rate hikes coming anytime soon in Europe.

Indeed, the expectation or the UK or perhaps 2 rate hikes during this year and possibly 3 rate hikes for the world’s leading economy in the US.

The disparity of the UK and the US increasing interest rates and leaving the ECB to keep rates the same would mean a much higher yield for both the US Dollar and indeed Sterling which could also cause longer term problems for the value of the single currency. Therefore, this is one key reason for the recent weakness experienced by the European currency.

Various countries within the European bloc have also acted with much tighter lockdown policies as well as a targeted attempt to encourage their citizens to have their vaccinations.

This has caused problems not only for the economies with lockdowns impacting the figures but the combination of a low uptake in certain countries for the vaccine if we see any social uprising against the government this could also potentially have a detrimental impact on the value of the Euro.

Tomorrow morning brings with it the latest Eurozone Industrial Production figures for November. The data includes both month on month and year on year so it will be interesting to see what happens when the data is released.

If we see a fall on the expected figures this could potentially lead to Euro weakness and could therefore see Sterling break past 1.20 which it has been challenging to see during the month so far.

USD- Further interest rates to come this year

The US Dollar has continued to remain relatively strong vs both the Pound and the Euros as inflation continues to remain higher than the target. Inflation is clearly a problem globally at the moment after countries have emerged from the pandemic.

It is only natural that prices have started to rise owing to the slowing of the supply chain and with oil and gas still leading the charge in terms of prices it appears for the time being as there are little signs of inflation slowing anytime soon.

These factors have led to an increased anticipation of the US Federal Reserve looking to increase interest rates and according to some reports there is a chance of a further 3 rate hikes coming during 2022 for the world’s leading economy.

The USD did see a small struggle at the end of last week owing to lower than expected jobs data but inflation is expected to see a high of 7% when the latest data is released tomorrow afternoon.

Federal Reserve Chair Jerome Powell is due to speak later this week and any suggestions of further rate hikes coming in the near future is likely to provide the US Dollar with even further support.

Whilst the European Central Bank are determined to carry on with the status quo as and when the US do raise rates this is likely to see Dollar strength vs the single currency which is good news for anyone looking to move US Dollars into the Euro.

We end the week with the latest US Retail Sales data which will provide an insight into the health of the US economy. Expectations are for growth of 0.3% month on month so any change is likely to see a little bit of volatility to end the week for the US Dollar.

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