Bailey struggling with guidance
Morning mid-market rates – The majors
10th December: Highlights
- UK accused of not keeping its word on Brexit
- Jobless claims lowest in 52 years
- Economic tailwinds dying off
Storm clouds gathering for the Prime Minister
This is firstly due to the fact that he was accused of misleading markets in the run-up to the most recent meeting and more importantly, not only is he unable to gauge the mood of his colleagues, but he is unsure of his own vote.
There are merits to trying to take back control of inflation by raising interest rates, a move that would signal the end of historically dovish monetary policy but could see several areas of the economy suffer.
Equity markets would most likely correct, the property market would experience a significant slowdown, although it has weathered the withdrawal of Government support well. Should the logistics issues and shortages continue well into the first quarter, such a move may now be considered premature.
Prime Minister Boris Johnson is facing further pressure from within his own Party over revelations about last year’s Downing Street Festivities while the country was in full lockdown. The critical issue of whether he knew what went on under his own roof remains unclear.
In the spirit of raking over old coals, questions are now being asked about whether he knew who paid for the refurbishment of his flat.
This could easily be part of a plot to oust Johnson, whose eccentricities mean he may be becoming a liability.
It is rumoured that the favourites for the job; Dominic Raab and Rishi Sunak are beginning to consider their next moves. Raab has been tainted by his performance over the evacuation of Kabul when he was Home Secretary, while Sunak has guided his nascent ministerial career with an eye on the main prize and has so remained scandal free,
Sterling is coming under pressure due to uncertainties over the Omicron variant. Yesterday it fell to a low of 1.31710, a fresh low for the year, although it did recover a little to close at 1.3220. There is clearly interest to buy at around the 1.3170/80 level, but it is unclear if it will be sufficient to avert further weakness if there is an apparent divergence of monetary policy between the UK and U.S. following next week’s Central bank meetings.
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Records tumbling as labour market recovers
While this is a cause for celebration and may have some bearing on the decisions of the FOMC to accelerate the rate of withdrawal of additional support, the number of jobs created is still well below the numbers in employment prior to the Pandemic.
The unemployment rate published in last week’s November report showed that the unemployment rate fell from 4.6% to 4.2% while the participation rate, the percentage of eligible workers who are either in work or actively searching, only rose from 61.6% to 61.8%.
There were still eleven million unfilled vacancies at the end of October, this means there is still sufficient slack in the jobs market for further improvement.
The headline weekly jobless claims figure fell by 43k to a low of 184k. While this is significant, it is unclear whether it will have any effect on the voting intentions of FOMC members next week.
As well as the votes on interest rates and the level of support, the FOMC members own economic projections will be released. These will show how the recovery is taking hold in different areas of the country and will also provide some insight into how the Omicron variant is being dealt with.
Based on experiences from the Delta variant, it is likely that there will be some slowdown in hiring and demand for services will fall slightly.
A new poll of economists in the U.S. that was published yesterday showed that a majority now expect the Fed to hike rates far sooner than had been expected, while they also see any hit to the economy from Omicron to be less severe than had originally been predicted.
In line with projections from Fed officials, it is expected that there will be two rate hikes in 2022, the first coming early in the second quarter.
The dollar index continues to be both well-supported and hemmed in at the same time. This is leading to sellers placing orders around the 96.60 level, while buyers emerge around 95.80.
Yesterday, the index rose to a high of 96.37, but was unable to rally further and fell back to close at 96.22.
ECB hoping to weather the storm
This is in direct contrast with the UK, where the Government is being accused of dithering and not providing certainty despite having introduced Plan B earlier this week.
Despite claims made by the EU Commission President Ursula von der Leyen that the take-up of vaccinations has been high in some nations, Austria is a prime example the population has shied away and is now suffering the consequences.
The effect of lockdowns on the economy is potentially devastating and couldn’t have come at a worse time.
The tailwinds that had propelled the economy forward over the past few months have now ended and left in their wake a feeling of inevitability.
Third quarter growth across the whole Eurozone was 2.2% while this is moderate, it was significantly better than anyone could have predicted at the end of the first quarter.
The still uncertain health situation and the slow take-up of second and third jabs means that there is an uncertain few months ahead for the economy.
At next week’s ECB meeting, any discussion about what will happen in March when the current support is due to expire will be tabled with a view to waiting until the January meeting, when the situation over Omicron will be clearer.
The fate of the euro hangs in the balance, given the expected divergence of monetary policy between the U.S. and Eurozone. That having been said, the market remains heavily oversold, and this is, for now, providing a degree of support to the single currency.
The feeling in the market is that if the dam around 1.1220 is broken, the move to 1.10 will be swift, with some participants now looking for it to reach between 1.0850 and 1.09.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”