Craig Ince
December 17, 2021

Supply Chain Issues Continue to Slow Euro Economic Recovery

GBP

Markets for the Pound in recent weeks have been hit hard by the uncertainty of the Omicron variant. Many thought we were slowly coming out of COVID related market movement and monetary policy or economic data news would again take centre stage. The mid-November bullish movement against the Euro, which saw trading levels spike at 1.1932, was soon wiped away with a 3 cent drop in the value of Sterling against the Single currency. The pound along with a handful of other currencies such as the Australian Dollar and New Zealand Dollar are seen as ‘risky’ to invest in. Any uncertainty in the markets will usually see these currencies fall in value. ‘Safer’ currencies such as the Euro, US Dollar, Yen and Swiss Franc tend to be the destination of choice. COVID cases in the UK are amongst the highest they have been with daily positive cases yesterday reported 88,376. In the last 7 days alone 442,378 positive cases have been identified in the UK, an increase of 31.4% compared to the 7 days prior. This highlights the contagiousness of the new variant.

Thursday saw the highly anticipated December meeting for the Bank of England (BoE). After they completely wrong-footed the markets by failing to hike rates in November it was hard to determine their next move. Probability of a rate hike was said to be somewhere between 10-30%. Many believed the recent developments of Omicron would again halt any rate hike ambitions. The bank of England hasn’t raised interest rates in December since 1994, a move which they often refrain to do to ensure the festive period for the country’s economy runs smoothly. However, Wednesday’s inflation data again increased the heat on the central bank. Inflation levels in the UK came in at 5.1%, up from the 4.2% in October. This is the sharpest increase in a decade, smashing October’s previous title. The BoE estimated inflation would top out around 2%, the UK is marching towards an inflation figure three times their initial prediction. This data started to increase the possibility of a rate hike.

A resounding 8-1 vote by the Monetary policy Committee (8 voted to hike, 1 voted to remain) saw the UK’s interest rate increase from 0.1% to 0.25%. GBP/EUR levels spiked above the 1.18 mark again for the first time since 29th November, topping out at 1.1829. Cable rates spiked nearly a cent to break through the 1.33 barrier for the first time since the start of December. The pounds gains were short lived against the Dollar and Euro, rates dropped back into its pre-decision range. The uncertainty in the UK over Omicron a possible cause of this.

EUR

The Euro has enjoyed its safe haven status as of late, the European Central Bank’s (ECB) latest meeting shortly followed the Bank of England’s. In contrast to the BoE, the ECB president christine Lagarde has continuously put off any talk of Interest rate hikes. Most reports are leaning towards a 2023 and maybe even 2024 rate hike. With the Eurozone economy within 0.3% of its pre-pandemic levels, pressure is being put on Lagarde to ‘keep pace’ with other major Central banks. Lagarde is still confident inflation on the continent is transitionary but realigned her inflation projection and see’s inflation above 2% for the remainder of this year and for 2022. Inflation in Europe is currently 4.9% a figure which towers over the 2% projection by the bank. The ECB will cut bond purchases under its 1.85 trillion Euro Pandemic Emergency Purchase Programme (PEPP) and will look to wind down the scheme in March. Bond buying under the ECBs Asset Purchase programme will increase over the next 6 months, to act as a bridge and ensure a smooth transition from the end of the above-mentioned PEPP to the ‘normal’ economy. Most notably Eurozone interest rates were kept at 0, with Lagarde sticking to her previous stance on hiking.

Supply chain issues are still rocking the continent, they are starting to slow the economic recovery. Lagarde estimates the bottlenecks will be an ongoing issue buy will ease some time in 2022. The Omicron Variant is hasn’t yet managed to spread as quickly as it has in the UK, case numbers are moderate compared to across the Channel. News of France’s plans to shut the borders to citizens from the UK is the latest round of travel restrictions which could soon become continent wide. Unsurprisingly countries such as Austria, Belgium and Netherlands who were highly criticised by the population for implementing lockdown measures, are seeing case numbers dwindle in time for the festive period. Nevertheless, with the festive period just over a week away, along with 7 day transmission data coming out of the UK showing a 31% increase, the continent is not out of the rough yet

USD

Wednesday Evening saw the latest Federal Reserve (FED) meeting, Chair Jerome Powell was recently reappointed at the end of November by President Biden for another 4-year stint. The Central bank left interest rates as they were for their December meeting but made some positive announcements elsewhere. The speed of Quantitative easing (QE) tapering has been doubled to $30 billion a month. This will now mean in January $60 billion is pumped through in asset purchases compared to the $90 billion previously. February will see $30 billion in asset purchases and then March will be 0. Initially the Feds target was May, they have managed to shave off 2 months. Despite this, there will still be an estimated $8.8 trillion in assets the central bank has accumulated over the course of its QE scheme. Powell has also changed his tone on ‘transitionary’ inflation and now see’s it as a longer-term threat. The big news of the meeting is the clear signal of policy tightening by three 25 basis point rate hikes across 2022, another three in 2023 and a final two in 2024. Investors were anticipating a more dovish tone from the FED with Omicron being thrown into the mix, this was soon blown out of the water with their stance. Jerome Powell stated after the Fed sees very strong and rapid growth for the country and acknowledged US wages are increasing at their fastest pace for a number of years. GDP forecasts for 2022 were increased 0.2% up to 4%, despite the unknown of Omicron. The outlook for the Dollar for 2022 and beyond looks promising if they can avoid any hiccups.

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