A Hectic Week in Prospect
Sterling slipped during the week as the chances of a base rate increase from the Bank of England in December receded further as the new variant of Covid took hold and now look a relatively remote prospect. The dollar remained sought after as last week’s data, including the latest inflation print of 6.8%, all but confirmed that the US Federal Reserve will tighten policy at its meeting this week. Meanwhile, the euro managed to have a relatively quiet time and bounced around, closing pretty much unchanged over the week. However, there is creeping political uncertainty in Europe and the UK starting to weigh on sterling and the euro. With elections in Italy as early as January 4th next year, Presidential elections in France during April and a new coalition government in Germany, the markets are beginning to watch the situation with increasing interest.
Despite the backdrop of political uncertainties and the pandemic, the currency markets will mostly turn a blind eye to their developments. Instead, they will focus on a week of central bank meetings that will have repercussions into the early months of next year. However, it must be added that President Putin could disrupt these plans if he decides to invade Ukraine. First, up this week, the Federal Reserve holds its last Open Market Committee meeting for the year on Wednesday when an acceleration in the tapering of its asset purchase scheme is expected to be announced. Following hot on the heels of the FOMC, the Bank of England and the European Central Bank hold their monthly meetings on what is sure to be dubbed “Super Thursday”. All in all, a challenging few days ahead in what is most likely to be the last whole trading week of the year.
Until a week or so ago, the currency markets were pretty confident that the Bank of England would be tightening policy this week and raising base rate. With the onset of Omicron and the introduction of further work from home advice, the market has reassessed the likelihood. During the last week, the noises from the policymakers have become more dovish, and it would now be a significant shock if base rate was to rise. But, having sprung a major surprise last month when it didn’t raise rates as expected, it would be foolhardy to write the chances off totally. Sterling has suffered from losing its “base rate rise” premium and has consequently been drifting lower over the last week. Friday’s disappointing Gross Domestic Product may well have been the final nail in the coffin data-wise on the base rate expectations. Ahead of Thursday’s Bank of England Monetary Policy Committee meeting and announcement, there is plenty of data, some of which may change the mood of policymakers, being released starting tomorrow with Unemployment and Average Earnings along with the Consumer and Producer Price Indexes. These may give the Bank of England pause for thought and will be studied closely for further signs of inflation becoming embedded. On Friday, after the MPC meeting, Retail Sales and the GfK Consumer Confidence reports are published.
At first sight, the European Central Bank has a more straightforward job ahead at its council meeting on Thursday. Inflation remains broadly in control, and there is not quite the expectation of tightening that the Federal Reserve and the Bank of England face. However, internally there is a split between the doves, mainly from the Southern States and the hawks from the north. The Germans are the most outspoken opponents to any extension of the easy money policies, but they are not alone. However, market expectations are that they will not be able to exert enough influence to get the European Central Bank to change its tone. If the ECB doesn’t hint at some tapering and, as expected, the Federal Reserve accelerates its asset tapering, US yields will again pop up, and the euro will continue to underperform. On the contrary against sterling, it may continue to regain some poise unless the Bank of England pulls an unseasonal surprise out of the hat. Eurostat will release October’s Eurozone Industrial Production and Wednesday ahead of the meeting. On Thursday, Markit’s preliminary Purchasing Managers Indexes for December will give the market a feel for how much damage Omicron is doing to the economy. A busy week will close with the Consumer Price Index for the Eurozone on Friday morning.
The Federal Open Market Committee meets on Wednesday, and the financial markets’ eyes will turn towards it. With the economy growing strongly and inflation printing a 40 year high of 6.8%, there will be one topic on their agenda: whether to accelerate the pace of the tapering of asset purchase. If they decide to do so, which seems the most likely course of action, the way to an early rise in interest rates is open. The only major obstacle to this scenario is the emergence of the Omicron variant of Covid; however, Chairman Jerome Powell and several of his colleagues fear rising prices more and have already changed their language retiring the use of the word “transitory” concerning inflation. With the Fed set to tighten ahead of either the European Central Bank or the Bank of England, the dollar can be fairly expected to carry on climbing. It is worth remembering as year-end approaches, that is traditionally a dollar negative period, consequently, any moves may be limited. Before the meeting on Wednesday, Retail Sales are announced, and after the meeting, Jerome Powell will hold his usual press conference. On Thursday, as usual, initial jobless claims will be published, and they are joined this week by preliminary Purchasing Managers Indexes for December from Markit.
The Swedish krona was very much rangebound and did not benefit much from the euro sell-off on Friday. December is generally a krona positive month, and today we will get the important Consumer Price Index(CPI) figure. This will be the last important reading for the year that may be of particular interest for the Riksbank. The CPI figure is expected to come in at 3.5% on a year-on-year basis, and on Wednesday, we will get the Unemployment Rate for November, which the market expects to come in at 7.6%.
The Norwegian krone, too, had a rather uneventful week and recovered some ground after being heavily sold-off the week before last. On Wednesday, Norges Bank Governor Olsen is due to announce the latest Interest Rate decision. The market still widely expects it to go up by 0.25% to 0.50%, and if this turns out to be the case, Norway will have raised rates twice this year. The focus will be on the press conference after the decision when we listen for nuances and any potential guidance for 2022.