Growth within acceptable bounds
24th December: Highlights
- Supply chain issues to lead to restructuring of transport sector
- Strengthening U.S. economy can withstand Covid onslaught
- Service sector growth being hit hardest by Omicron
Who cares if GDP is 1.1% or 1.3%
While it is clear from the spike in infections that Omicron is highly infectious, it is also far less likely to see those who are infected ending up in hospital. However, the heightened rate of infection, Wednesday saw almost 120k new infections, means that the number of people self-isolating and therefore unable to work has gone through the roof.
With schools having close to two more weeks of holiday, it is hoped that after the next couple of days, where friends and relations will gather to celebrate Christmas, there may be an opportunity to see something of a firebreak.
The economy grew at 1.1% in the third quarter of the year. This was a little lower than the 1.3% that had been published previously.
The fact that this is even considered newsworthy is testament to the fact that market activity is slowing considerably as we enter the last week of the year and stories are hard to come by.
Overall, following the vaccination campaign which has culminated (for now) in the pressure being exerted for all adults to get a third jab, the Government’s actions after initially being accused of dithering, have been about as correct as could be expected in a fast moving and fluid situation.
The opposition in Parliament has been left to feed off year old stories of Downing Street Parties since it cannot criticize either the financial or social actions that have been.
The Office for National Statistics has confirmed that the funding for the hospitality that the Chancellor announced earlier this week is affordable since the economy is continuing to recover from the pandemic.
It is still expected that the economy will finally return to pre-Pandemic levels by the end of Q1, although the possible slowdown as the Bank of England starts to try to tackle inflation could delay that by a month or two.
The pound has gained a little strength as the dollar continues to correct lower. It is a fairly common phenomenon in the last couple of weeks of the year for the overwhelming trend to reverse as traders close their books for the year.
Yesterday, the pound rose to a high of 1.3437 and closed at 1.3420. Sterling has also made progress versus the single currency. This reflects the divergence of interest rate policy. The pound close at 1.1839, having earlier reached 1.1884
Faster introduction of rate hikes brings its own problems
Although the action of doubling the pace of the reduction in additional support for the economy was expected, Powell’s comments exceeded the level of hawkishness that the market expected.
While this should lead the dollar higher, breaking solid resistance that has built up around the 96.60 level, as the trading year has wound down the depth of the correction has taken some by surprise and led to a greater divestment of dollar longs than would typically be expected as those who came to the party late are forced out of their positions.
A change in Fed policy was expected by the markets, two or even three meetings prior to the latest one. The initial reduction in support is now seen as preparatory, allowing the markets to get used to the idea of a more hawkish Fed.
It was the retirement of the term transitory that should have got the market to sit up and take notice, since this was the true pivot point, where the Fed’s focus changed from growth to inflation.
It could be argued that the FOMC has been one meeting behind the curve, but in the grand scheme that is unlikely to either make too much difference or be held against Powell and his colleagues.
Regional Fed Presidents have been absent from the newswires since the Fed turned more hawkish. It will be interesting to note how the discussion evolved when the minutes are released on January 5th.
For now, the dollar index is likely to remain within a narrowing range. Yesterday. It fell to a low of 95.99 and closed at 96.05
Lagarde facing a tougher year as policy comes under attack
Over the past few years, the dollar index has risen to prominence as a method of valuing the Greenback against its trading peers. This has led to the euro occasionally being propped up, given its high percentage in the makeup of the basket.
If this trend is to continue, there may be a change coming in which the currencies that make up the index become more reflective of the United States’ current trading partners.
The euro makes up 57.6% of the basket, but the continued inclusion of the Canadian dollar, Swiss Franc and Swedish Kroner appears a little outmoded.
Given the way the value of the euro is often driven by movements in the index created by the need to hedge the constituent parts, the same must be true for Switzerland and Sweden, which will affect its monetary policy calculations.
Christine Lagarde has stood firm in her belief that the only way to defeat the continuous mediocre performance, outside the Pandemic from several Eurozone members, is to set their economies on a less constrained path. This has meant allowing inflation to rise and has led to a two-speed recovery.
It is as easy to make the case for tighter monetary policy as it is to remain dovish. Up until now the consensus on inflation policy has been fairly arbitrary. It has been driven by the financially stronger nations but has had no basis in any majority belief.
The sea-change that was affected in the summer has highlighted divisions that have existed virtually since the Eurozone came into being but have remained in the shadows.
One further ongoing discussion will be the further Federalization of the region. With one of the two main proponents now having left office and the other facing an almighty struggle to be re-elected, it is safe to say that that project is now on the back burner.
The comparative strength of the euro over the past few days is a perfect example of its being driven by a correction in the dollar index. Although it fell marginally yesterday to a low of 1.1290, it recovered to close at 1.1334
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.”