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Political simmer

Markets have started the week on an upbeat note, but political headlines continue to keep risks on a simmer. In the UK, revelations surrounding the 2020 Christmas period at No. 10 have added to growing news reports of misuses of power and lack of control in the Johnson administration. Tory strongholds like North Shropshire are in danger of revolting, which might imperil the Prime Minister’s position. On a brighter note, the weakness of Johnson’s position has resulted in submission in the long-running fisheries dispute with France, which might have a knock-on effect on the rest of the unresolved Brexit negotiations.

Russian tensions over the military build-up on the Ukrainian border are also heating up. Yesterday, G7 ministers issued a joint statement condemning Russian aggression and calling for de-escalation to avoid ‘enormous political and economic consequences’. In 2014, the US imposed sanctions on Russia following the invasion of Crimea, but this latest provocation seems likely to incur a much broader reaction.

Bottom line: Most of this past week's headlines have been an evolution of ongoing tensions rather than fresh revelations. The net effect has been to reduce general market anxiety and allow for a resumption of a cautious risk-on sentiment. Even the Federal Reserve’s change in tack seems to be viewed for what it is: a change in tone rather than a serious revision of policy. The US yield curve suggests the Fed will take moderate policy action, likely to raise rates in a measured fashion, which could either stifle growth, or harness inflation—monetary policy fireworks aren't expected, despite last week's pivot in language. It looks like we might yet have a quiet Christmas, which would be a refreshing change of pace.

The week ahead


There was more pain for the Pound last week as the recent downtrend of Sterling’s trade-weighted index continued. The measure of Sterling strength recorded its lowest level since the 26th of January 2021, meaning that GBP/USD fell below the 1.32 mark for the first time since December 2020. Headlines last week centred around the UK government’s comments on the Omicron variant, with Prime Minister Boris Johnson announcing new measures to stop the spread, including working from home and vaccine passports for all major events. The focus for the coming week predominantly lies with the Bank of England, which will announce its latest interest rate decision on Thursday. Meanwhile, UK labour data, inflation figures, and retail sales results are all due out this week.

  • On Monday, the Bank of England will release the results of a stress test that determines the stability of the UK banking system. The BoE will also release its Financial Stability Report along with its Financial Policy Committee statement and meeting minutes.
  • Monday will also see BoE Governor Andrew Bailey speak with regards to the central bank’s Financial Stability Report at 5:30PM.
  • UK employment figures are due on Tuesday, with the Unemployment Rate predicted to fall from 4.3% to 4.2%, while the Average Earnings Index 3m/y is expected to dip from 5.8% to 4.6%.
  • Wednesday sees the release of inflation data, with the y/y Consumer Price Index forecast to jump to 4.8% from 4.2% previously.
  • On Thursday, the BoE will announce its Monetary Policy Committee's rate votes along with the Official Bank Rate in conjunction with any change to asset purchases and a summary of the Monetary Policy Committee meeting.
  • Before the BoE announcement, flash Services and Manufacturing Purchasing Managers’ Indices will be released. The Services figure is predicted to fall from 58.5 to 57.1 while Manufacturing is forecast to come in at 57.5 from 58.1.
  • Friday’s m/m Retail Sales figure is forecast to remain unchanged at 0.8%.



Last week, the Euro once again traded flat against the US Dollar, moving just 0.04% from the week’s open to close. Likewise, the common currency ended the week just 0.20% worse against the Pound as markets went into a wait-and-see mode following news of the Omicron variant. The European Central Bank will likely announce the end of the Pandemic Emergency Purchase Programme at this week’s monetary policy meeting; however, the emergence of Omicron has added extra uncertainty meaning that a decision on the Asset Purchase Programme may be delayed until the new year. All eyes are on Christine Lagarde’s rhetoric around inflation and whether the current spike can still be referred to as transitory.

  • European Industrial Production m/m is forecast to increase to 1.20% from -0.20% on Tuesday.
  • On Thursday, the German flash Manufacturing PMI figure is predicted to fall from 57.4 to 57.0, while the Services equivalent is expected to decline from 52.7 to 50.9.
  • Later on Thursday, the European Central Bank will announce its Main Refinancing Rate, which will remain at 0.00%. This will be released in conjunction with its Monetary Policy Statement and will be followed by a press conference.
  • On Friday, the German ifo Business Climate release is expected to come in at 95.3 after printing at 96.5 last month.



The trade-weighted US Dollar Index has firmly consolidated around the highs of September 2020 amid market caution over Omicron. The Greenback now sits around 7.0% better versus the Pound from the 1.4248 reading posted on June 1st this year. In recent weeks markets have scaled back bets on UK interest rate hikes while maintaining expectations of hikes in the US—set to start mid-2022—and this goes some way to explaining recent gains for the Greenback. The Federal Reserve are also in focus this week as the US central bank is likely to take a hawkish turn in Wednesday’s meeting. Expectations are for it to double the pace of its taper from $15bn to $30bn per month from January and shift its dot plot to indicate three rate hikes next year.

  • On Tuesday, the Producer Price Index m/m is forecast to fall from 0.6% to 0.5%.
  • Retail and Core Retail Sales m/m will be released on Wednesday; the core measure is forecast to drop to 0.9% from 1.7%, while the overall figure is likely to come down to 0.8% from 1.7% previously.
  • Also on Wednesday, the Federal Reserve will release its Federal Funds Rate, Federal Open Market Committee Statement, and Economic Projections. Later, Fed Chair Jerome Powell will hold a press conference.
  • Thursday's flash Services PMI is forecast to print at 57.9 following a previous reading of 58.0. The Manufacturing equivalent is earmarked to remain at 58.3.


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