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The outlook for Sterling remains mostly unchanged since last week after the UK government implemented the initial phases of its ‘Plan B’ defence against the omicron variant. However, this move to ‘Plan B’ restrictions was quickly followed by suggestions that a so-called ‘Plan C’ may soon be announced which would involve tighter restrictions and put pressure on businesses as the year comes to an end. The possibility of a light lockdown after Christmas is certainly gaining traction as the government positions themselves to prevent the disaster we saw last January. Currently, the restrictions in the UK are nowhere near as strong as those introduced across many parts of Europe and so this bodes well for Sterling in the short-term. Looking forward at this week we will see several data releases with the highlights coming from the interest rate decisions in the UK, US, and Europe. The general feeling across the market is that the Bank of England will keep the interest rate at 0.1% and not opt to raise it to 0.25% – a move that was expected months ago but is likely to be put on hold until next February amidst an uncertain economy and a new variant on the scene. ILO unemployment figures are out on Tuesday, followed by key CPI and RPI figures out Wednesday morning. These usually give a good indication of where the economy is at, which will impact the interest rate decision which will be made on Thursday.
The Euro struggled against Sterling last week losing over 1% from Wednesday to Friday after tight restrictions were put in place across the continent. Germany, Austria, Italy, and many others have imposed tighter controls to help prevent the spread of the omicron variant before the Christmas period. According to the European Centre for Disease every single EU country identified an increase in infection rates during the first week of December. Although many EU governments are desperate to avoid any lockdowns, some countries are already bringing them in, such as Austria. Nightclubs are being closed in France over Christmas and there is a push for those aged 5-12 to get vaccinated as soon as possible. Whilst the coronavirus headlines will lead the way for the most part of the week, we look towards Thursday for the economic data to take over, with PMI Manufacturing and Services data being released first thing. This will of course be followed by the ECB meeting where they will decide on their interest rates, which is likely to be left unchanged.
The Dollar outlook was bolstered at the end of last week when official figures confirmed U.S. inflation rose to a new multi-decade high last month, this will likely keep the Federal Reserve on course to accelerate its monetary policy normalisation next week and thereafter. Inflation rose to 4.9% which means it’s the highest level since 1991. The largest contributors to the price increases were gasoline, food, and new vehicles. There are all goods that have been massively interrupted by coronavirus containment efforts, leading prices to rise sharply over the last year. Investors now turn attention to the Feds meeting this week to try and assess clues on the future path of the monetary policy. On the other hand, the greenback benefited from lingering threats from the Omicron variant, as some nations introduced renewed restrictions amid a spike in global infection cases.
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