Craig Ince
January 14, 2022

Sterling Continues Bullish Run

Sterling’s recent bullish run since the tail end of 2021, should not come as a surprise to investors who have been tracking the Pound’s progress. The UK economic outlook and conditions have been providing a pathway for the Pound to accelerate into for a while. The well-known V shaped economic recovery first mentioned in 2021, means the UK economy is nearly back to its pre-pandemic levels. The Gross Domestic Product (GDP) figures released for October showed the UK was within 0.4% of its February 2020 levels. This morning the latest GDP figures were released, November’s growth was 0.9%. GDP grew 1.1% in the 3 months building up to November. The economy is now 0.7% above its pre-pandemic level. This is a key piece of data as it was the last month before Plan B restrictions were put in. Nevertheless, Omicron hit in December, so there is uncertainty how much damage Plan B has done to GDP.

GBP/EUR has breached the 1.20 level this week for the first time since 19th February 2020, with 1.2012 setting the new 23-month high. The Pound has been the best performing G10 currency of 2022. Recent findings and announcements by the government about Omicron have largely contributed to this success. The government’s stance of not locking down and adding tighter restrictions, gives optimism for the UK’s recovery to remain on track. COVID-19 self-isolation plans are being drawn up to cut the period of isolation of the fully vaccinated down to five days, a move that could ease the strain of surging numbers of workers needing to stay at home. COVID cases, although eye wateringly high, are starting to continuously decline with just over 109,000 positive cases reported yesterday. Over the last 7 days, the UK has seen a 24% decrease in positive cases. Could we be through the peak of this 4th wave?

These views and findings have increased the heat on the Bank of England (BoE) to hike rates again at the 3rd February monetary policy meeting. The market anticipates a 75% chance of a second-rate hike to follow December’s initial hike. Some analysts also believe a May 2022 price hike may also be on the cards. The central bank seems to be taking rising inflation levels more seriously than its counterparts. Analysts expect UK’s interest rates to top out at 1% at year end, which could put the BoE clear of the Federal reserve (Fed) and European Central Bank (ECB).

GBP outperformed the Euro for 2021, we started the year at 1.1180 and finished on 1.1950. A 6.9% increase for the pound. The pound also managed to claw back some ground on the greenback this week, with Cable levels trading at 1.3747 the highest level for 10 weeks.

Euro

Euro again has had a mixed start to 2022, as mentioned above it has given away a lot of ground to the bullish advance of Sterling. This week EUR/USD, which makes up 24% of all currency trades worldwide, has managed to rise just under 2 cents from high to low with the Euro finding some mild gains.

Europe’s inflation is soaring, levels of 5% were breached in December. The ECB has always been adamant the inflation is transitionary, and inflation will stay at 2%, yet the data continuously tops this figure. Contributing factors are supply bottlenecks which still hamper the continent and energy costs across the Eurozone rose 26% over the last year. Europe is suffering with an energy crisis, with wholesale gas prices across Europe spiraling out of control. Liquefied natural gas prices were stabilised in December to €90 per megawatt hour, which is a 350% increase in a year. This is set to continue partly due to the confrontation between Russia and Ukraine, causing uncertainty on the functionality of Russian pipelines into Europe. French Finance minister Bruno Le Maire thinks electricity prices of up to 40% are coming ‘if they don’t find a solution in the coming days’. Poland has already increased its VAT on car fuel after inflation peaked a 21-year record of 8.6%. Energy in Europe is likely to continue to fuel rising inflation levels across Europe into 2023.

This all combined with increasing cases of the Omicron variant which is now sweeping through Europe. The World Health Organisation estimate half of Europe’s population could be infected within six to eight weeks. They are labelling it as a ‘west to east tidal wave’. Seven million new covid cases were reported last week across the continent, with infections doubling in the last 2 weeks. France’s Health minister Olivier Veran has acknowledged January will be tough for Hospitals across the country. Omicron patients are taking up ‘normal’ beds and the Delta variant is putting strain on ICU wards. With such a vast area in land mass and differing countries views on Covid across the bloc, it seems hard for the countries to sing from the same hymn sheet. Poland is the latest country in the Eurozone that has recently surpassed 100,000 deaths from Covid-19 and almost 40% of its population is unvaccinated. It is estimated the European Union has suffered over 923,000 deaths due to the pandemic.

The ECB’s continuously Dovish stance to inflation across Europe, is going to be an interesting watch over the next few months. Tabloids across Europe have started taking aim at ECB president Christine Lagarde, labelling her ‘Madam Inflation’ and ‘Luxury Lagarde’

USD

The greenback has started 2022 on the back foot, after being notoriously strong for the second half of 2021. The dollar fell to a two-month low against a handful of currencies after US CPI data fell short of the expected increased levels. This therefore failed to ignite any hopes of an increasing hawkish fed stance. In December US CPI levels surged with the annual increase in inflation the largest in four decades since 1982. Inflation rose to 7% year on year and a 0.5% month on month from November to December. The US economy appears to be ready for an interest rate hike in March to try to gain some control from rising inflation. However, Jerome Powells ‘dot plot’ to raise interest rates has been leaked and the market already has high hopes for the Fed this year. The hot data release has just reinforced what people are already anticipating the Fed to do next. Analysts have priced in an 80% chance of a rate hike in March. However, Mr Powell has given no clear indications he is in a rush to speed up plans to tighten monetary policy and hike rates. This has put increased pressure on the Dollar in recent days.

Some economists believe Inflation in the US will slow to less than 3% by the end of this year. A combination of easing supply networks which will lower costs, key commodity prices dropping from pandemic highs and the Fed’s tightening monetary policy will all enable this to happen. Up to four rate hikes are set to be announced this year by the Fed, which could see rates reaching 1-1.5%.

With the USD being a safe haven, once Omicron fears settle down across the market risk appetite could increase. This may enable a handful of the ‘riskier’ currencies to advance on the Dollar. Barclays are bullish for the pound against the dollar and predict Cable levels to be trading at 1.42 by the end of 2022.

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