The new Omicron variant has now been reported in over fifty countries. Reports suggest that cases in the UK are doubling every two to three days. The government has announced further restrictions in England, including mandatory face masks, working from home if possible and vaccine passes for some venues. The measures are likely to lead to a sizeable Tory rebellion when voted on by MPs tomorrow.
Last month, the MPC voted 7-2 to keep Bank Rate unchanged at 0.1%. Disappointing October GDP data with 0.1% growth and the new Covid variant will weigh on the BoE’s decision. This week, the MPC will see the labour market and inflation data before making their decision. This decision is likely to be finely balance. We expect to see a similar voting split to last month, though it would not be surprising to see additional members vote for a hike.
CPI inflation in October increased by 4.2%, more than double the BoE’s 2% target. It is likely to jump further in November, up to close to 5%, with higher food, petrol and used car price. The unemployment rate fell to 4.3% last month and may fall further to October. We will also see flash PMIs, retail sales and GfK consumer confidence later this week.
GBPEUR – 1.1719
GBPUSD – 1.3225
The European Central Bank is taking a different view to the BoE and the Fed. Asset purchases are expected to continue next year, though the rate of these purchases may slow. Headline CPI rose to 4.9% in November which is the highest rate since the euro was created. Members of the ECB will be concerned that inflation may not decline as quickly as forecast. Even with a reduction in asset purchases, ECB interest rates are not expected to start rising until much later than the UK and US.
The ‘regular’ asset purchase programme (APP) may be increased from the current monthly €20bn to partly compensate for the end of PEPP next year. The PEPP has averaged €70bn a month recently. There is speculation on the level of the APP going forward, though this may well not become clear until the impact of the omicron variant is better known next year.
EURUSD – 1.1285
EURGBP – 0.8534
The US Federal Reserve also provide a policy update this week. With inflation still rising, Fed Chair Powell has said that the word ‘transitory’ will be taken out of their description. Recent economic indicators have pointed to a strong labour market and the potential for stronger final quarter GDP growth. There remain risks for disruption from the Omicron variant.
The Fed announced the start of QE tapering last month and is likely accelerate that pace this week. That would pave the way for interest rates to be increased as early as the second quarter of next year. In September, the Fed’s ‘dot plot’ showed an even split among policymakers on whether the first hike will be in 2022. The updated dot plot this week is expected to show a majority expecting a rate rise next year. There may also be more members signalling more than one hike in 2022.
Despite retiring the word ‘transitory’ to describe inflation, the Fed’s view is still that inflation will eventually fall back. CPI inflation increased to 6.8% in November, and may hit 7% next month. This week we will also see retail sales, Industrial production and the latest flash PMI readings.
GBPUSD – 1.3225
EURUSD – 1.1285
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*Interbank rates correct at 7 am on the date of publishing.