29 December 2021: Sunak’s support decision correct

Sunak’s support decision correct

29th December: Highlights

  • UK Economy predicted to bounce back after Omicron
  • Omicron creating GDP concerns
  • Covid, not Omicron, the major risk to recovery

UK countries undecided over restrictions

The three regional assemblies of the UK, despite having access to the same data that ministers in Westminster see, have decided to take a completely different course in combatting infections of the Omicron Variant of Covid-19W

While there is apparent agreement that the current variant is more infectious, but infection is less serious, the issue around the effect on the various economies created by those infected or even exposed to someone with Omicron is the source of the divergence.

The fact that a record of close to 130k new cases on December 27th, yet there were only 18 deaths, would point to the English response being the more forward-looking.

The fact that Boris Johnson faces a backlash from his backbench support should he announce further curbs has led to Health Minister Sajid Javid confirming that there will be no further restrictions announced before the New Year.

This decision has been described as a lifeline by the hospitality sector that had been fearing similar restrictions to those announced in Edinburgh, Belfast and Cardiff being brought into effect.

Looking forward to the first few weeks of 2022, it is expected that the pound will continue to hold its own, even if the dollar begins to rise again due to the obvious willingness of the Bank of England to tighten monetary policy to fight inflation.

Several predictions have been made by analysts pointing to the potential for the UK economy to thrive in the period following the Omicron Variant being brought under control since output and activity should be able to regain lost ground fairly quickly.

Inflation data for the UK will be published on January 19th with employment being released the previous day. These two data releases will shape the trajectory of the pound for the first month or two.

Yesterday, the pound climbed to a high of 1.3461 but fell back to close slightly lower on the day at 1.3434.

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Inflation needs action not words

The FOMC may be facing with having to accelerate the space at which it is withdrawing support for the economy if inflation continues to rise. It may also have to raise interest rates as soon as is practicably possible.

Jerome Powell clearly got it wrong in the middle of the year when he played down inflation fears. Having said that, the actions that he took were correct, it was the advance guidance that was a little off.

Given his time again, it would be interesting to see if he would have turned hawkish more quickly.

The pace of growth in the economy has slowed and the bottlenecks caused by the Pandemic are having a more long-term effect that had been imagined.

The housing market remains white-hot and this to some degree if being affected by the fall in availability of new homes and the effect of the shortage of raw materials on housing starts.

The employment report will be released on January 7th and the early expectation is for between 250k and 300k new jobs to have been created in December.

The FOMC will meet on January 25/26 and may well provide advance guidance of a far earlier first hike than had been expected.

The general expectation is that given divergence of monetary policy that the dollar will outperform during the first half of 2022.

Yesterday it continued to build a sturdy base just below the 96 level and looks set to return to test the resistance at 96.60.

Lagarde set for a tough battle

Austria may be one of the smaller economies in the northern part of the EU, but it possesses one of the more Hawkish Central Banks. The Governor of the Austrian National Bank was strident in a recent speech that should inflation not be brought under control in the near future, that the ECB would have to act.

It is, of course, impossible to define what is meant by the near future, but Robert Holzmann is certainly aligned with Jens Weidmann at the Bundesbank.

Weidmann will step down this week and his replacement will be an interesting choice for the new Government.

Will they choose a less confrontational President who is less of an inflation hawk, or will the new Chancellor want to maintain the pressure on ECB President Christine Lagarde to return to a focus on inflation over support?

Opposite to the dollar, the expectation of the market is for the euro to remain weak until the ECB starts to discuss tighter monetary policy.

That is unlikely to happen in the first, or even the second quarter, but it is clear to see that advance guidance to the market may be even more effective than actual action taking place.

The euro is expected to start the New Year on the back foot, with concerns over a slowing economy coupled with rising inflation raise fears over stagflation.

Yesterday, the single currency was in a narrow range between 1.1333 and 1.1289. It closed at 1.1311.

Have a great day!
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.”