Central banks to add volatility into year-end

Below we keep focussed on the major Central Banks, but no less than TWENTY central banks meet this week. Balancing inflation, growth and the Omicron wave isn’t easy!!

 An important week in the UK, Europe and the US as central banks meet & tell us what action will be taken to fight inflation and unwind the exceptional measures taken to support global economies throughout the pandemic.

EURO: The single currency has been characterized by weakness throughout the 2021, and the EURO has fallen through critical levels at 1.1520, 1.1365 and currently sits around 1.1250. On Thursday the ECB meets and announces decisions on interest rate and monetary policy. The ECB has recognised that inflation was ‘here to stay’ at higher levels than previously anticipated and is widely expected to keep the PEPP [Pandemic Emergency Purchase Program] on hold on Thursday. Markets also expect the PEPP will start to wind down in March 2022 – it is hard to find many positives around the single currency.

 USD: Hugely important policy meeting on Wednesday evening - The Fed is widely expected to announce accelerated tapering at the December meeting and could hint at sooner than expected rate hikes to counter the inflationary risks. The market has seen some major repositioning for this event, and although the USD had a poor day yesterday, the details of this week’s meeting are critical for the USD as we enter 2022

 Last week’s inflation data at 6.8% was the highest since 1982 – but once again, equity markets shrugged it off and continued to climb.

 Morgan Stanley this morning forecast continued USD strength into 2022, and as the EU and US messages become more divergent, expect €/$ to continue to struggle. They also predict Norway and Canadian economies to out-perform due to energy prices and central bank policies.

 GBP: Attention this week turns to the Bank of England Monetary Policy (BoE MPC) meeting on Thursday, as investors seek guidance on the bank’s forecasted lifting of interest rates and reduction of its bond buying programme. The base rate is at a historic low of 0.1% - and Societe Generale’s ecnomists expect the Bnka of England to ‘reluctantly’ leave rates on hold this week.

 After Sunday’s announcement by the PM that the UK should expect ‘a tidal wave’ of Covid cases, the UK has a raised Covid alert level. Following recent hawkish comments from members of the BoE, many economists are predicting a 15 basis point (bp) rate hike to be pushed back into 2022.

 The maker-up of the vote will be of key importance, indicating how easy or difficult any future rate decisions will be. GBP/USD has been falling due to USD strength – currently at 1.3250 and looking vulnerable. GBP/EUR remains near 1.1750 thanks to a weak €€ but seems unsteady after the previous 2 sessions. 

Rabobank have revised down GBP targets for 2022 – now predicting GBP/$ under 1.300:

“In total, we anticipate that the MPC is likely to raise rates by 40 bps next year, to take Bank rate to 0.5% on a 1-year view.”. This is counter to the market prediction o of almost 1% rises over the next year.

 GBP/USD  1.3250

GBP/EUR  1.1780

EUR/USD  1.1260

GBP/AUD1.8650