It was a busy week for the FED, ECB and BoE – all announcing their positions on inflation and vision for the new year. There were surprises from the BoE but expected stiffness from the ECB and predicable hawkish outlooks from the FED. As we approach the year-end, we can anticipate some calm before Christmas but, uncertainty around Omicron and policies of action rather than inaction might rock the sleigh.
USD
The FED decided it would not raise interests rates last Wednesday and will not commit to any rise until they have finished their tapering program. In 2022 we can expect 3 rate hikes once tapering has cooled off and in the meantime, they are expecting to double the tapering pace from $15 billion a month to $30 billion per month. Tapering and rising rates are both bullish for the dollar with the DXY nearly breaking its 2021 all-time high touching 96.9 on Wednesday’s announcements. The dollar is still king and the throne looks unlikely to be challenged in the short and medium-term.
EUR
It was more of the same from the ECB with President Lagarde directly saying “this lady isn’t tapering,” and “the current increase in inflation is expected to be largely temporary,” their optimism continues to be unequivocal. But this will leave the EUR lagging far behind USD and GBP as both the FED & BoE will be well on their way to tackling inflation with interest rates hikes and tapering early into 2022 leaving investors questioning their patients. Inflation is however nearly half that in the US so perhaps the long game will play out well for the Lagarde but it’s worth remembering that Europe is far more sensitive to Covid than the US.
GBP
The BOE made waves with its surprise interest rate hike last Thursday – rising rates from 0.15% to 0.25%. It was the first major bank to raise rates in an attempt to curb inflation and even out-hawked the FED. This saw GBP rally as much as 0.8% against USD. But with a Prime Minister who likes to party and the GOV was quick to crash this one with rumours of impending lockdowns that saw GBP/USD fall from its Dec high of 1.337 to 1.323. The overaction of the UK Gov re omicron could impact the pound further over Christmas and uncertainty remains whilst we await the final GBP number before the end of the year.
Week Ahead
Tuesday
EUR Consumer Confidence(Dec)
Wednesday
GBP Gross Domestic Product(Q3)
USD Gross Domestic Product Annualized (Q3)
Thursday
USD Durable Goods Orders(Nov)
USD Nondefense Capital Goods Orders ex Aircraft(Nov)