Concerns around Covid have spooked the markets again with the new Covid variant. Travel restrictions have been imposed into the UK from six southern African countries. Further restrictions are expected as scientists rush to understand the new variant. The initial market response was a drop in equities and move into safe haven assets, though the dollar slipped from recent highs. This may be because it makes near-term monetary policy tightening less likely.
There is still a good chance of a December interest rate hike by the Bank of England. For the latest Covid developments to have an impact on activity, we would need to see further domestic restrictions. This doesn’t look likely at the moment. However, central banks may still feel that the economic situation is uncertain enough to justify waiting for longer before raising rates. Several MPC members are scheduled to talk this week. It is unlikely we will get much of a steer with a finely balanced decision ahead for December.
Last week we saw strong PMI readings in manufacturing (58.2) and services (58.6), being a rise and fall respectively on previous months. Along with a strong CBI industrial survey, we appear to be starting the final month of the year strongly. This week there is not much data, with second readings of the PMIs which may highlight further supply pressures. We will also see bank lending data which will provide indications on the latest trends in the housing market and general spending.
GBPEUR – 1.1830
GBPUSD – 1.3334
The EU was already seeing a spike in Covid cases and the reintroduction of restrictions before the new Covid variant. With a case identified in Belgium and concerns over this new variant, we are more likely to see further restrictions and lockdowns before the end of the year. This will probably further slow any ECB policy response as they continue to focus on stimulating economic growth no matter what the near-term trend for inflation looks like.
Inflation this week is likely to have risen further above the European Central Bank’s inflation target. Policymakers continue to signal that they see the increase as temporary and so are unlikely to tighten monetary policy in response, particularly with the uncertainty around Covid. Last week saw Eurozone PMIs rise with manufacturing at 58.6 and services at 56.6. The German IFO survey, however fell to a seven-month low of 96.5, reflecting supply issues.
EURUSD – 1.1272
EURGBP – 0.8453
This week, we will see speeches from several US Federal Reserve policymakers’ including Fed Chair Powell and Treasury Secretary Yellen who will testify to Congress. Powell still wants to guide markets about potential policy moves well in advance. This week will be their last chance to signal whether tapering may be sped up in December, before the pre-meeting quiet period. The Fed have said they are looking closely at inflation and jobs date, with their preferred inflation measure rising at an annual rate of 5.0% in October.
This week’s labour market report may give the Fed more reason to speed up tapering, with a strong rise in October and a further increase above 500k jobs expected on Friday. It appears that economic growth has picked up again in the fourth quarter, despite supply constraints. We expect unemployment to fall further to a new pandemic low of 4.5%. We will also see the November ISM surveys for manufacturing and services, which may further add to the picture of ending the year strongly.
GBPUSD – 1.3334
EURUSD – 1.1272
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*Interbank rates correct at 7 am on the date of publishing.