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Tiffany Duff
January 17, 2022

Pressure on European Central Bank to Raise Interest Rates

Pressure on European Central Bank to Raise Interest Rates

Sterling

Sterling continued with its bullish run during last week’s trading. Highs of 1.200 for GBP/EUR were reached despite previous concerns regarding the Omicron variant and its potential effects on the UK’s economy.

As cases of COVID-19 begin to fall in the UK and the isolation period set by the government has been slashed to 7 days there are hopes that the worst of the Omicron wave is now behind us and we will now understand how to live with the virus. However, due to high infection numbers seen in recent weeks, there are several staff shortages across many different sectors which could have diverse effects on Unemployment figures due to be released this Tuesday. Due to the changes made by the Health Sectary to the number of days needed to spend in isolation, businesses will find it easier to operate moving forward and ease the pressure on health services moving forward.

The prime minister has recently come under fire following his admittance to attending a party during one of the UK’s lockdowns last year which is now under investigation. This did little to support Sterling and provided some resistance after 22-month highs.

During this week we will also see the release of inflation figures which are expected to remain at similarly high levels since they were last reported. The Bank of England (BoE) announced a rate hike in December to 0.25% so eyes will be on the monetary policy committee once again to see what they plan to implement to tackle fast-rising inflation levels.

Euro

Gross domestic product Data releases from Germany last week saw reported economic growth of 2.7% year on year which failed to reach pre pandemic levels. Supply chain issues and surge in COVID-19 cases restricted growth in the second half of 2021. Despite these figures being lower than pre-pandemic levels it could indicate some economic recovery.

As reported in Germany and widely across Europe, COVID-19 cases continue to rapidly rise. However, despite this, France has lifted its ban on nearly all travel between France and the UK. All people aged 12 and over will be required to show a negative test within 24 hours of arriving. Many hospitality venues and public attractions in France however do require some form of vaccination passport for travellers to enable them to attend.

As seen in the UK and worldwide inflation continues to rise in Europe. Pressures are on the European Central Bank (ECB) to raise interest rates, but unlike the BoE this looks unlikely to happen. Inflation across Europe currently stands at around 5% and is consistently rising.

This week will see the release of the Consumer price index figures, both month-on-month and year-on-year. In previous months we have seen the Euro struggle against its major currency pairings however now that restrictions may begin to ease, this could give the currency the well-needed boost it needs.

US Dollar

As mentioned earlier Sterling continues to rise against its major currency pairings. GBP/USD was trading at around 1.37.

Last week saw the release of the consumer price index (CPI) data for the US. A common theme throughout the report is inflation and the US is no exception to this. They have seen soaring inflation levels, potentially the highest seen in several decades. The Federal Reserve (Fed) had labelled these inflation levels and cost of living increases as ‘transitory’ due to the COVID-19 pandemic but also supply chain issues which have affected many countries. Fed official Patrick Harker has called for action against inflation. He stated that he foresees 3 or 4 interest rate hikes in the coming year.

“We do need to take action on inflation. It is more persistent than we thought a while ago. I’ve been off the ‘transitory’ team for a while now,” stated Harker. The next rate decision announcement will be on Wednesday 26 January.

Looking to the week ahead, we can expect joblessness figures to be released. This can have the potential to create market volatility should the reported numbers increase, however, the prediction is this number will continue to decrease.

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