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US and UK rate policies diverge

As Christmas approaches, the market seems to be reaching a crescendo. The Omicron variant of Covid has created loads of price volatility as speculation of its impact has changed assessments of growth and inflation. Perhaps less perceptively, geopolitical tensions are growing even though the market doesn’t seem to be pricing them.

In the UK, interest rate markets are finally giving up on a December rate hike following comments from the Monetary Policy Committee’s Michael Saunders—falling in line with the argument we've made in recent weeks that the earliest rate hike could be February. In the US, the Federal Reserve has gone the other way, signalling a faster timeline for monetary policy tightening. In light of the new Covid strain, the rationale for this can be most likely ascribed to politics. Jay Powell has retained the central bank chairmanship but has pivoted closer towards his competitor's position; Lael Brainard’s firmer line on inflation was received quite openly by markets and legislators, making this a necessary course correction.

On a more sinister note, geopolitical tensions are on the rise and hint at armed conflict. The US administration has revealed a great deal of intelligence to EU Heads of State that suggests Russian intentions are to invade Ukraine ‘in early 2022’. According to the Financial Times, 175,000 Russian troops are strategically placed along the border while another 100,000 wait in reserve. 

Bottom line: Last week’s economic data broadly points in the right direction: inflation is proceeding at its current pace, Consumer Confidence is taking a small hit from admittedly good levels, and Purchasing Managers’ Index data is showing more modest—but still positive—increases in conditions. According to these measures, growth is still on track and the new Covid strain hasn’t done anything to dislodge it. Most data on this variant seems to suggest it's more infectious but mild in presentation, which is likely to elicit more circumspect reactions from government authorities.

The week ahead


Sterling continued to drift lower against the US Dollar over the course of last week, with the pair finishing 0.8% in the red. Hawkish comments from US Federal Reserve Chairman Jerome Powell helped to fuel an initially lower gap at the start of the week with the Fed Chief retiring the word ‘transitory’ and effectively admitting inflation may be here to stay. Top hawk at the Bank of England, Michael Saunders, has said he may need more time to assess the impact of Omicron on the UK economy before the next meeting. Markets have since shifted their expectations of a rate hike in December by the BoE to just 30.0%. There’s little UK data due out this week with news on the Omicron variant likely to continue to fuel moves in Sterling.

  • The British Retail Consortium Retail Sales Monitor y/y is due tomorrow with a reading of 0.3% forecast for November versus -0.2% for October.
  • UK Gross Domestic Product m/m is predicted to read 0.3% for the month of October following a 0.6% reading in September.
  • UK Industrial Production m/m is forecast to rise 0.1% in October compared with a 0.4% decline in September.
  • UK Manufacturing Production m/m is also scheduled for release this week; market expectations are pointing to a 0.1% rise in October versus -0.1% in September.



EUR/USD remained relatively flat over the course of last week despite some quite large swings amid comments from US central banker Jerome Powell. In some ways, divergence in monetary policy has never been clearer, with European Central Bank President Christine Lagarde labelling inflation as a bump in the road with zero rate rises likely next year. Meanwhile across the pond, Powell has opted to embrace a hawkish view. Although a policy reversal is unlikely from the ECB, calls for more hawkish forward guidance have surfaced amid larger-than-expected inflation rises in October. A continuation of this dovish policy stance by the ECB is likely to contribute to further Euro weakness in the coming weeks and months, barring any dramatic policy U-turn.

  • German Industrial Production m/m is forecast to come in at 0.8% for October after seeing a 1.1% contraction in September.
  • German ZEW Economic Sentiment looks set to fall to 25.9 in December following last month’s reading of 31.7.
  • Eurozone ZEW Economic Sentiment is likely to follow a similar pattern to Europe’s largest economy with a reading of 22.4 this month versus 25.9 in November.
  • European Central Bank President Christine Lagarde will speak on Wednesday at 8:15AM and on Friday at 9:05AM.



The US Dollar Index is trading above the $96 handle this morning amid a volatile week of central banker commentary and data releases. The hawkish tilt from Fed Chairman Jerome Powell looks to be just in time for this Friday’s Consumer Price Index print which is expected to be the highest reading for 40 years, reaching 6.8% year-over-year in November. This could amplify bets of further rate increases next year, while a faster bond taper looks likely in the December meeting as the labour market continues to improve. A headline miss on Non-Farm Payrolls on Friday blurred what was perhaps a positive jobs report; the Unemployment Rate in the US fell to 4.2%, average hourly earnings rose to 4.8% for the year, and labour market participation hit its highest level since the pandemic began.

  • The latest JOLTS Job Openings for October will be published this Wednesday. The openings for September stood at around 10.44M, staying relatively unchanged from the August reading.
  • US Unemployment Claims look on course to remain relatively flat for the week ending 4th of December, with the consensus pointing to a 225K reading compared with 222K in the previous week.
  • US CPI and Core CPI m/m readings for November are expected to read 0.7% and 0.5%, respectively, versus 0.9% and 0.6% in October.
  • Preliminary University of Michigan Consumer Sentiment due out this Friday could climb from last month’s 67.4 reading to 68.2 this month.


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