9 December 2021: Pound sinking over omicron action

Pound sinking over omicron action

9th December: Highlights

  • MPC becoming a challenge
  • Economic growth depends on path of inflation
  • Greek recovery a testament to tough love

Sterling under pressure from political shenanigans

Trust in the Government is being eroded with every sordid detail of a party held last year at Number 10 emerges. Despite his denials of attending the event or even having knowledge that it even took place; Boris Johnson is facing angry questions from his own MPs about yet another apparent abuse of power.

Having claimed one victim as the staffer who was recorded making inappropriate comments about the event, it is unlikely that the furore will die down in the near future and at the end of the day it is a distraction that the Government doesn’t need as it introduces owing spread of the Omicron variant of Covid-19.

There are inconsistencies in the new advice that is being brought in.

With facemasks already required in shops and on public transport, that necessity has been extended to include theatres and cinemas but not bars or restaurants.

Working from home is again required if it is possible to do so, although if not consideration must be given to the wearing of masks in the workplace.

Next week’s MPC meeting is becoming less of a certainty than had been imagined just a couple of weeks ago.

The likelihood now is that there will be no hike in interest rates before the year-end as the burden of proof has again shifted. There is nothing to stop the Bank of England raising rates between meetings if the threat of the variant is considered to be less serious than first feared, while inflation continues to rise.

Over the past couple of years, the traditional slowdown in market activity around the middle of December has not happened.

Two years ago, Brexit was keeping traders on their toes, while last year, it was the prospect of the Holiday Season being severely curtailed that added a degree of uncertainty.

Yesterday, the pound continued its recent weakness. That was most pronounced versus the Euro, where it fell to a low of 1.1645 and closed at 1.1653. That was its lowest close since October 1st.

Against the dollar, Sterling fell to a low of 1.3160 but recovered to close at 1.3224

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FOMC pressured over inflation

The FOMC is facing increasing pressure over the rise in inflation and its Chairman Jerome Powell despite retiring the term transitory, still believes that bottlenecks and lack of supply are the main causes for price rises, and they will abate without the Central bank needing to take drastic action.

While the financial markets accept and understand the reasoning, the public only sees the cost of the Holidays rising before their eyes and are becoming disenchanted that monetary policy again seems to be being managed in order to keep stock markets strong.

A rise in interest rates would appear to be preferable, in the eyes of the man in the street, than wholesale increases in the price of items that they have to buy every day.

The fall in equity markets precipitated by the more hawkish recent comments from Jerome Powell has now been completely recovered, although that rise has been labelled as the froth on the cappuccino by several analysts who see the rise in asset prices mostly driven by a few well-known stocks, as being overdone.

Valuations in equity markets have moved away from their traditional methods and now seem to be based upon the discounted future earnings from the likes of Amazon, Apple, Google, and Tesla. The irony is that these companies supply the data for future earnings themselves. Thus, they are almost setting their own stock prices.

It is becoming something of a recipe for disaster that could rival the mortgage-backed security led market collapse at the start of the financial crisis.

All it took was one firm to say hang on a minute, and the whole financing method collapsed. Were that to happen to estimates of future growth for, say, Netflix as their coverage begins to level off and the same thing could happen again.

While there have been several comments about the timing of a rate hike, all that is expected from next week’s meeting is a probable acceleration of the taper of asset purchases. It may be that Powell and his associates cling to the hope that before it becomes absolutely necessary to hike rates, inflation will begin to slow of its own volition.

In the short-term, inflation data has overtaken employment data as the most eagerly anticipated monthly data release.

Yesterday the dollar remained within its now familiar range, it again reached 96.39 but fell back to close at 95.96.

Lagarde likely to prevail over further support

When the European Union came into being, changing from being a trade group to what it has become today, one of the major benefits was the creation of a common market of close to 450 million people that would dwarf even the United States.

While that has seen some benefits as well as several drawbacks, the biggest disappointment has been the level of trade between members. This has seen imports, particularly of raw materials and parts for every industry, continue to be imported as the Union still cannot compete with China.

Major exporters, particularly like the luxury car sector have established markets outside the EU and, although there has been some progress made with companies like Mercedes-Benz, they do not wish to disrupt their own supply by chasing sales within the region.

The size of the market was one reason why the European Commission was unable to understand Brexit and reacted so angrily to the UK’s withdrawal.

One of the principal reasons for the UK’s departure was pressure to sell into the single market to the virtual exclusion of the country’s traditional partners.

The country has always looked west and wasn’t prepared to potentially damage its relationship with the U.S.

The ECB continues to believe that inflation, having risen without any policy change, will fall in the same manner. This hopeful policy, or lack thereof, is beginning to be questioned by the more hawkish Central Banks throughout the region and next week’s ECB meeting could be a lively affair.

When the year is reviewed, it is probable that the ECB President will be seen as having driven policy in the right direction by many but favouring growth over inflation is still not convincing.

The debate about what will happen after the expiry of the current round of PEPP which happens at the end of Q1 will be interesting, but it is expected that Lagarde will continue to hold sway.

The euro is still predicted to test the 1.10 level in the short term but probably lacks the momentum to do so before the Holidays.

Yesterday, it climbed back above the 1.13 level reaching 1.1354 and closing at 1.1348.

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.”