December 16, 2021

The dollar inched up on Thursday, as investors wait on monetary policy decisions from the UK and the EU, following the US’ hawkish turn on Wednesday. As the Omicron variant spreads rapidly across the UK, market expectations surrounding whether the Bank of England will raise interest rates have swung back and forth, under concerns the bank needs to address the economy and prevent a surge in inflation.

Sam Cornford, Partner and Head of Trading

Main Headlines

Federal Reserve Officials announced yesterday, that they expect to raise interest rates three times in 2022, taking a more aggressive approach to managing surging inflation. They followed this by suggesting three more rates rises in 2023, followed by a further two in 2024. This highlights a dramatic change from their projections three months ago. They also announced they would remove the stimulus several months earlier than expected, in January, where they will begin reducing purchases by $30 bn a month. They emphasized that this would ensure the Fed was not increasing the size of its balance sheet by the end of March.

As the omicron variant continues to rapidly spread across the country, it was announced yesterday that the UK had reported a record number of daily coronavirus cases since the pandemic began. As of Wednesday evening, the UK hit a record of 78,610 coronavirus cases in the past 24 hours. The prime minister addressed the nation and urged people to think cautiously before attending events but reiterated they would not be cancelling events. To cope with this surge in cases, Royal Mail and the UK Health Security Agency have struck a deal to advance delivery of lateral flow tests. From Saturday, 900,000 home deliveries of lateral flow and PCR test kits will be possible, which is double the current level.

GBP

Sterling is stronger against the dollar and weaker against the euro this morning. A review of the UK army’s £5.5 bn Ajax armoured vehicle programme found it has ‘serious failings’ and did not protect soldiers from the potential harm involved in the vehicle’s trials.  Yesterday, the defence procurement minister told MPs he was ‘horrified’ and promised to appoint a senior legal figure to look at the root cause of the programme which has left 11 suffering long term effects from the noise and vibration.  Elsewhere, an annual report published by the Migration Advisory Committee recommended that social care workers should be immediately added to the UK visa priority list. This follows staff shortages in the sector and the committee also recommended that the government set up a formal route to allow low skilled workers into the UK.

EUR

The euro is well bid against most major currencies overnight. The EU has proposed to scrap long term gas supply contracts in an effort to end the bloc’s reliance on suppliers such as Russia. Yesterday, The European Commission revealed the plan, which aims to prevent member states entering gas contracts with non-EU countries that run beyond 2049. The announcement follows a period of record prices for wholesale gas which has been surged by factors such as rising demand post-Covid, as well as reduced additional supplies from Russia.  Elsewhere, the Ukrainian President urged The EU to deter a military attack from Russia by implementing pre-emptive sanctions at a summit of the EU’s Eastern Partnership Program on Wednesday. While the EU did not agree to the request, they did reiterate their preparedness to hold Russia accountable.

USD

The dollar is weaker than most major currencies in early morning trade. Democrats hopes to pass their $2 trillion Build Back Better deal by the end of the year are dwindling after Senator Joe Manchin declined to offer support due to the bill’s child tax credit. Manchin wants the credit, which began in July and offers low-income Americans who owe no income taxes monthly cash instalments, to be taken off the bill in efforts to keep the bill at $1.75 trillion over a decade. The final monthly payments of the tax credit are due on Wednesday and a ten-year extension of it would cost $1.4 trillion. Other democrats are lamenting without the payment, children and their families will suffer and some will fall deeper into poverty.

Markets

European equity futures rose on Thursday amid speculation that Federal Reserve policy tightening will help fight elevated inflation without derailing economic growth. S&P 500 and Nasdaq 100 contracts climbed, while European futures were up almost 2%. Elsewhere, Asian stocks rose and a weaker yen aided shares in export-reliant Japan, which led regional gains. Technology shares powered Wall Street to a strong close, reversing initial declines following the Fed’s policy statement. The Treasury yield curve steepened and the dollar fell. Oil climbed and gold ticked up. Bitcoin oscillated around $49,000. The U.S. central bank said it will double the pace at which it tapers bond purchases to $30 billion a month and projected three quarter-point interest-rate increases in 2022, another three in 2023 and two more in 2024.

Main Economic Data/ Central Banks/ Government (All Times CET)

9:15 a.m.: France Dec. manufacturing, services PMI

9:30 a.m.: Switzerland policy rate

9:30 a.m.: Germany Dec. manufacturing, services PMI

10:00 a.m.: Norway deposit rates

10:00 a.m.: Euro-area manufacturing, services PMI

10:30 a.m.: U.K. Dec. manufacturing, services PMI

11:00 a.m.: Euro-area Oct. trade balance

12:00 p.m.: Turkey repo rate

1:00 p.m.: BOE bank rate, bond target

1:45 p.m.: ECB refinancing rate, deposit rate

2:30 p.m.: ECB’s Lagarde holds conference

2:30 p.m.: U.S. Nov. housing starts; weekly initial jobless claims

3:15 p.m.: U.S. Nov. industrial production

Europe’s ARA inventories

Corporate Events

Earnings: Adobe, FedEx, Rivian, Accenture

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