Households facing a tough year
4th January: Highlights
- Action on energy bills overtaking Omicron in public consciousness
- Dollar gaining strength ahead of NFP
- Italy under Draghi will pose a problem for Brussels
Government playing down Omicron threat in England
There are several prospective pitfalls for growth in Q1, including Omicron (and any other potential variant of the virus), Inflation spreading to wages and continuing increases in energy prices.
The Bank of England is committed to combating inflation following the rate increase sanctioned by the MPC in December.
The lack of further restrictions over the Holiday Period has provided a certain respite to the hospitality industry that was fearing the loss of 30% of businesses in England had they been forced to close.
In Scotland, Wales and Northern Ireland restrictions have been enacted by their regional assemblies and the effect on their economies is yet to be felt.
Prime Minister Boris Johnson in a speech yesterday confirmed that the Government’s Plan B is still effective given the relatively small number of hospitalizations in comparison to infections caused by the new variant.
The pound will remain supported by the more hawkish stance adopted by the Central Bank, but there is still the possibility that the economy may slow until shortages of raw materials and in particular chip production return to pre-Pandemic levels.
The reactive stability of the political outlook where a general election is not due to be held until May 2024 will also bring more confidence in the country’s financial markets.
Any strength displayed by the pound will only be relative to other currencies as the fracture between nations who will be raising rates to fight inflation and those who are struggling to find growth continues.
This week is relatively quiet from a data perspective, so the pound will be reactive. Yesterday on the first trading day of the New Year, the pound fell against the dollar, reaching a low of 1.3431, but it recovered to close at 1.3473.
Market to get a peek into Fed thinking on Monetary Policy
Having dropped the term transitory from its lexicon, the FOMC has committed to inflation being a factor for a considerable time, possibly, the whole year.
The removal of emergency support for the economy, the withdrawal of which was announced in November and accelerated last month, will provide support for the dollar but may not be as advantageous for the economy.
The Jury is still out on how strong the economy is currently and the prospects for continued growth given the continued issues being seen in the supply sector.
Data for new home starts was encouraging at the end of last year. This has been interpreted as an indication that the supply issues are drawing to a close, but other industries remain pressured.
As with the rest of the global economy, deliveries of microchips are under pressure, ironically due to a new outbreak of Coronavirus in the Wuhan District of China. This is both the centre of chip manufacturing in China, and the original source of the Covid-19.
Optimism over the country’s employment market is improving as jobless claims have continued to fall over the Holiday period. Claims have been below 200k recently and this has raised expectations for this week’s headline for non-farm payrolls
The most recent prediction is for 400k new jobs to have been created, up from 210k in November.
Anything above 300k is likely to be supportive for the dollar index. Yesterday, it rose to a high of 96.32 and closed at 96.29.
Economy beginning to emerge from logistics issues
The issue that has been a major factor in the reporting of inflation over the past few months has been the significant difference in price rises across the entire region.
There are significant differences between the rate of inflation, which may be attributable to what is included in the data, and the ability of certain countries to verify their own data.
While this only currently affects inflation data, questions are beginning to be asked about other data releases, particularly around growth and output.
Italy is making a comeback as a potential thorn in the side for both Brussels and Frankfurt.
Following its inability to comply with the strict financial guidelines regarding debt to GDP ratios and budget deficits, it is expected that the man who was credited with saving the euro, is going to be charged with undertaking a similar role for his homeland.
Mario Draghi is being favoured to take over as Italian President in the near future.
Weaning Italy off its use of the ECB to purchase its government debt was always going to be a difficult undertaking. As soon as the ECB announced its post-Pandemic stimulus policy review 8n mid-December, the writing was on the wall for Italian Government Bond Yields.
Italian yields are the prime test of how financing within the Eurozone is holding up, and so far, not so good.
If Draghi becomes President, he will leave behind an unusual situation. Under his Prime Ministership, Italy has certainly stabilized politically, but unfortunately that is unlikely to remain the situation for long.
As mentioned before, there are four Parties running neck and neck in the polls, so the turmoil is likely to begin again. Any truce sufficient to allow two parties to form a government is unlikely to be more than tenuous.
The first half of 2022 will see issues arising in both the political and the economic arena. Preparations are continuing for the French Presidential Election, where the result is far from certain. The promotion of Mario Draghi from Prime Minister to President will leave behind the customary trail of accusations and counteraccusations.
Economically, the withdrawal of the PEPP to be replaced by the much weaker pre-existing APP will need careful management by Christine Lagarde, who will also be likely to be facing a battle with the hawks over inflation policy.
At the risk of sounding like a broken record, the euro is likely to be pressured by the continuing divergence of monetary policy, but with the spectre of more internal issues emerging, the outlook is anything but optimistic.
Yesterday, the single currency fell to a low of 1.1279 and closed at 1.1292.
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.”