James Lovick
January 10, 2022

GBP

The pound continues to hover just below last week’s 22-month high against the Euro as it finds renewed support at the start of 2022. The prospect of more interest rate hikes to come from the Bank of England is one reason that the Pound has moved higher. The other reason is due to a significantly better outlook on Covid and specifically surrounding Omicron compared to just a few weeks ago when it was quickly discovered how infectious this new variant was.

Covid cases in the UK are staggeringly high, having recorded 178,250 cases on Friday. However, the NHS has so far been able to withstand the sudden onslaught of cases which has meant national restrictions this time around have been limited with most of the economy very much open for business. It is fair to say that the markets for the time being feel considerably more comfortable about the Omicron variant. This rapid change in fortune has improved the outlook for the UK economy. So much to say that it gives the Bank of England more scope to tackle the inflation problem head on in the months ahead. The markets have been quick to react leaving the Pound on higher ground.

It is true that the NHS is currently facing severe staff shortages because of the spread of the Omicron variant. If this problem worsens then it is conceivable that more restrictions could be reintroduced, which the currency markets would likely have something to say about.

Once again Covid continues to be a significant driver for Sterling exchange rates with more volatility expected on both positive and negative developments.

The National Institute of Economic and Social Research will release its latest GDP projections tomorrow afternoon. The data is often deemed an excellent indicator for what the official GDP numbers may look like when released in the future. Any big shifts could see market volatility for Sterling exchange rates on the back of the data.

This week ends with UK GDP data for November released on Friday morning alongside industrial and manufacturing production data.

EUR

European Consumer Price Index inflation data on Friday arrived higher than expected taking the headline number up to 5.1%. This now represents a record high for the EU since the single currency was incepted. The high number puts added pressure on the European Central Bank to take action to try and stop further increases in prices. 

The Financial Times reports that Carsten Brzeski said “This should be the peak, but headline inflation will stay elevated at least until late summer, especially as higher wholesale energy prices are passed through to retail consumers and other parts of the economy. As also reported in the FT, ECB chief economist Philip Lane takes the view that “We do think inflation pressure will ease over the course of this year” adding that the case for raising rates “is not there”.

So, there are some differing views for EU inflation. If the ECB is forced to take action, then this could see the divergence between the central bank and the Bank of England narrow. In a broad sense this should be seen as positive for the Euro. If, however, the ECB pursues its current stance that inflation will be transitory, and the Bank of England pushes forward with further interest rate increases then this could see the Pound strengthen further against the Euro.

EU unemployment data for November is released this morning and could help shape policy at the ECB which may impact on Euro exchange rates.

USD

The dollar looks set for more volatility after the US recorded on Friday mixed signals in the labour market. On the one hand US non-farm payrolls recorded just 199,000 new jobs created, a much weaker number than forecast. However, there was a significant drop in the rate of unemployment last month. The headline figure fell by 0.3% in December taking the number to 3.9%. To put this into context the rate of unemployment was 3.5% before the pandemic struck. 

The Financial Times reports that the Federal Reserve is under pressure to stop soaring inflation which currently sits at the highest level in roughly 40 years. The report adds that officials see three interest rate increases in 2022 and a further five by the end of 2024.

Brian Rose, senior economist at UBS has said “The Fed has decided to put more emphasis on the unemployment rate over the payroll number.”

US Consumer Price Index inflation data are released on Wednesday and will be keenly awaited by the markets. It has become apparent that the high level of inflation has become entrenched to some extent which is forcing the US Fed to adapt monetary policy to ensure the problem does not become too embedded. Any big change in either direction is likely to see dollar market volatility. A high number will only put further pressure on the US Federal Reserve to take more pressing action when it comes to tightening policy including raising interest rates.

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