The markets and many individuals and businesses are watching how quickly Omicron is spreading. Further rapid acceleration of cases will boost speculation about further restrictions. Parliament is on standby to enact further measures if the data around severity of Omicron cases is negative. Concerns remain over potential further measures and any support from Chancellor Sunak if more restrictions are imposed.
Last week, the Bank of England raised its key policy rate from 0.10% to 0.25%. Although the timing was somewhat unexpected given the Omicron uncertainty, the move had already been pushed back from an expected move at the previous meeting. Higher-than-expected inflation, hitting 5.1% in November, was the key reason cited for the policy change. The BoE noted growing concerns about tight labour markets with potential upward pressure on pay.
This week we will see the third quarter GDP second estimate along with the latest reading for the household savings rate. It will indicate whether consumers have reserves to draw on. The first week of January also has few releases. Bank lending data for October will provide an update on the strength of the housing market. We will also see whether the falls in manufacturing and services PMI continue, potentially as a result of effects from the reactions to Omicron.
GBPEUR – 1.1749
GBPUSD – 1.3221
Around Europe, we have seen a significant increase in the number of Covid cases, which although in many cases not confirmed, are expected to be due to the Omicron variant. This has led to further restrictions on travel with France and Germany limiting travel to the UK. There have also been a lockdown in the Netherlands with further restrictions across Europe.
The European Central Bank also announced the immediate or future removal after March of some of the emergency monetary policy measures put in place during the pandemic. There will be some additional purchases which will pick up some of the balance. The Eurozone December CPI at the start of January will provide more evidence of near-term inflationary pressures.
EURUSD – 1.1252
EURGBP – 0.8511
Last week, the Fed doubled the pace of its asset purchase rundown. This will open the way for an earlier hike in interest rates. It also suggested that rates may rise three times in 2022. The central bank expects inflation to move down next year as the energy impact subsides and supply bottlenecks ease. However, they have acted to manage inflation expectations and ensure these remain well anchored.
The US labour market report in the first week of January will show whether the economic upturn was continuing to gather steam ahead of the latest Covid developments. There will also be an indication of recruitment difficulties continue. We will see the minutes of the latest Fed policy meeting in the first week of January.
GBPUSD – 1.3221
EURUSD – 1.1252
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*Interbank rates correct at 7 am on the date of publishing.
