In what has been a glum week for Sterling sellers, the Pound took a further blow after the Bank of England’s Governor Bailey’s speech this yesterday afternoon. GBPEUR fell half a cent to 1.173 and GBPUSD rates hitting below 1.33, but both rates seemed to recoup later on, bubbling around the same rate they entered the day with. The Governor stressed the impact the Coronavirus has had on the economy, and that those effects are still being felt. He said “Direct economic effects of COVID have attenuated a lot since the fall in GDP in the second quarter of last year, when we went off a cliff. However, there are still impacts that we are feeling from COVID quite strongly. Even now, services are recovering but we have still got quite a long way to go. That has put quite a strain on supply chains around the world.” The last statement rings true as both the UK and Germany’s Markit Manufacturing PMI data was released this morning; both coming in short of the consensus and worse off than the previous month by 0.07% and 0.06% respectively.
The new Omicron strain of Covid-19 has been dominating the news worldwide with plenty of currencies affected by a stock sell-off earlier this week, in fear restrictions and even possible lockdowns could be put back in place. A spokesman from the World Health Organisation confirmed that there is no evidence yet to determine whether there is an increased transmissibility or severity of disease. The government have taken steps to add some of the South African countries to the red travel list, as well as, mandating masks in shops and on public transport.
There was no mention of the upcoming interest rate decision, set for Thursday 16th December, which could see the Bank shy away from hiking interest rates again. Last month’s decision, which resulted in no change in policy, resulted in Sterling falling nearly 2 cents against the euro and over 2 and a half cents against the US dollar. The Bank have not hiked interest rates in December since 1994, and with the fresh Omicron Covid-19 strain news adding fuel to the fire, it could be said that a hike might be off the cards for the time-being. There will be plenty of economic data out before the decision, including Consumer Price Index figures, which details inflation within the economy every month. October’s figures reached 4.2%, a 10 year high for UK inflation, so an even further rise in this data could see the Bank hike rates on the 16th.
This week has seen the euro benefit from a shift in global risk appetite, boosting its reputation as a safer currency, being one of the most traded currencies in the world. The euro gained over 1.5% on Sterling this week, staying above 0.85 yesterday, and it’s the same story against the US Dollar, remaining above 1.13. The continent is not without its own Covid-19 issues with some of it’s members entering back into a full lockdown. Austria has placed a full lockdown for the next two weeks, with vaccines then mandatory in order to visit hotels, restaurants, and bars among other leisure activities. Germany, The Netherlands and Belgium have also reinstated some restrictions after a spike in cases.
Many investors would have an interest rate hike in mind for past 2022 for the Eurozone but, with inflation figures reaching 4.9% in the latest figures at a 13 year high), there may be pressure for the European Central Bank to start thinking of their own hike. ECB President Christine Lagarde has stood firm on her stance that the sharp rise in inflation over the last few months is transitory and can be attributed to the end of lockdowns in European countries. Boštjan Vasle, a top ECB official and governing council member, agrees with Lagarde but also believes that the gradual decrease of inflation will not be as quick as expected. “We’re already witnessing some pressures here, like higher wage demands in parts of the euro area,” he said. “If these pressures will materialise, the decline of inflation will be smaller and not so fast as currently expected.” The ECB’s PEPP (Pandemic Emergency Purchase Program) is expected to be tapered back in full by March of next year, and the end of this scheme has been described as a prerequisite for an interest rate hike. It is expected by the ECB that the PEPP will help tame inflation in line with an already expected cool-off after sharp rise, to help keep inflation in line with the 2% target.
President Lagarde will make a speech again tomorrow to describe in more detail, the tapering back of the PEPP. We will also see the release of Retail Sales figures month on month which is expected to increase by 0.5% to 0.2%, after September’s lacklustre figures.
The US Dollar has strengthened against a basket of major currencies due to its safe haven status, as well as some positive employment data releases. USDGBP jumped over 0.75 for the first time since this time last year, and continued highs against the euro, currently trading on the brink of 0.90 at the time of writing. The Omicron variant doesn’t seemed to have affected the USA yet in terms of cases so the USD will bolster its strength as investors look for the safest currency to hold their funds with.
Employment figures released yesterday from Automatic Data Processing Inc, the largest payroll provider in the US, have also helped the US dollar climb. An increase of 534,000 private-sector jobs were reported yesterday with the consensus 9,000 below that figure, showing a higher-than-expected reading. This release, along with tomorrow’s Nonfarm Payroll data, are two of the most important releases for the US as a growth in employment figures will increase inflation, which, in turn, increases the likelihood of the Federal reserve raising interest rates. Federal Reserve chair, Jerome Powell, stated yesterday for the Senate panel that the current tapering of the bond purchasing scheme will be discussed at their December meeting, in order to speed up the process.
“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner,” he said. “I expect that we will discuss that at our upcoming meeting.” The speeding up of this programme, positive employment figures, and rising inflation could all spell a sooner-than-expected rate hike for the Fed.
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