Client Newsletter - 20 - 12 - 21

Written by: David Comber
Date posted: 20.12.21

How do you solve a problem like……. Inflation? Well, there seem to be varied approaches to it at the moment. Last week saw the Bank of England heading in one direction, with the Federal Reserve and ECB heading in another. Who is right? Will the Omicron variant impact these policies? Only time will tell.

Plenty of developments to report as we head into the Christmas break with lockdowns and restrictions tightening in various parts of the world.

Merry Christmas

“December is a quiet time in the FX markets, right?”. Not this year, that’s for sure. Last week saw the latest round of major central banks repositioning themselves for what lies ahead. The big three (Bank of England, Federal Reserve & ECB) are all on different paths now as they try to combat rising inflation and the unknown economic impacts of the latest COVID variant.

Outside of these major economic events, restrictions are being rolled out across Europe in Austria, the Netherlands and France to name but a few. All of these have had a hefty impact on UK travellers heading to the continent for the festive period. As the UK hospitality sector understandably begins to struggle again, Chancellor Rishi Sunak came under fire for being away on a business trip in the US when it was felt he should have been in Blighty coming up with a support plan. He hastily returned.

Speaking of Cabinet members in the spotlight, Boris Johnson spent the week swatting away the questions about the “alleged” Conservative party Christmas party of 12 months ago, whilst the UK was under full lockdown. Then the man tasked with investigating the party had to resign when it was discovered he held a party of his own! Difficult times ahead for Boris certainly and not what he needs in a week where he is likely to have to roll out further restrictions. Do as I say, and not as I do…?

So we eased into last week with the Bank of England’s so called “stress test” on the UK banks as the only real event on Monday. The exercise runs an extreme scenario where if certain factors were to occur in the UK (unemployment up to 12%, GDP dropping 9%, house prices and commercial property losing 40% of their value), what the impact would be on the major banks. The good news is all banks passed comfortably, which is even better news for those hoping for a dividend at the end of the year. The slightly scary thought being that GDP globally is down 10%, a stark warning that these “extreme” scenarios might be closer than they once were.

UK unemployment data thankfully is still holding on well, with Tuesday morning’s release showing a 0.1% drop down to 4.2%. Crucially this was the first month of data after the furlough scheme ended (figures for October) which is positive. But will the recent spike in cases hurt the hospitality sector again this Christmas, leading to a rise in unemployment once the December figures land. We won’t know this until February, but at the moment it looks likely.

Over in the US the Producer Price Index (PPI) continues to spike, with a month-on-month jump in inflation of 0.8%, the highest since August. This will inevitably continue to flow into consumer prices.

Wednesday started off with the latest raft of frankly gloomy inflation numbers for the UK. I think that we can all agree that this is no longer a transitory situation with CPI now at 5.1%, the highest figure by some margin in the last ten years. If Andrew Bailey & co needed any more encouragement that an interest rate hike was the right move this month, then this was it. Markets reacted accordingly, with sterling pushing higher. Further up the supply chain, the retail price index (RPI) is now at a worrying 7.1%.

The rest of Wednesday belonged to the US with retail sales disappointing at just 0.3% growth for November. With Black Friday falling within that month, the figure raises concerns about consumer spending and whether a rate rise any time soon is the right approach at all. On which note, the Fed announced an expected speeding up of its tapering programme. The move is designed to give greater flexibility on monetary policy going forwards, with an expectation that we will see three interest rate rises from the US in 2022. Markets reacted with initial Dollar strength after the evening announcement, as shown in the GBP-USD chart below:


On to “Super Thursday” as it was dubbed, with the Bank of England first on stage to announce the first interest rate hike in the UK since 2018, up 15 basis points to 0.25%. For the second month in a row the move surprised markets, having last month left policy unchanged after suggesting the opposite. As mentioned, this is the Bank’s chosen strategy to attempt to cool soaring inflation, despite immediate concerns about the Omicron variant.

The question being is it the right approach? Sterling rose in the immediate aftermath, before retracing back to a similar level shortly afterwards, as shown in last week’s chart for Sterling-Euro shows below:


Shortly after the ECB reported on their own policy stance for the single currency. They are also effectively looking to taper their bond-buying schemes, with their Pandemic Emergency Purchase Programme (PEPP) confirmed as coming to a conclusion at the end of Q1 2022. Lagarde and her fellow policy members are still more in wait and see mode for now, rather than jumping into any sizeable action, hence the tough period the Euro has seen recently.

The last couple of weeks have shown extreme volatility at times for sterling as concerns grow surrounding the Omicron variant and also how markets will react to it. We have had times where in the space of an hour, prices have moved over 1%, which can be a sizeable loss or gain financially, depending on which side of the coin you are. To avoid any festive nightmares, make sure to reach out to the team this week to discuss pending requirements.

So into the last full trading week of 2021 we go and data releases are understandably a little thinner on the ground. Early Tuesday morning UK time, we have comments from the Reserve Bank of Australia as to their upcoming policy moves. Unemployment continues to head back in the right direction over there, so is their 2023 indication of an interest rate rise starting to be dragged forwards?

For the UK, GDP figures for the quarter to the end of September land on Wednesday morning, with 1.3% the expected number. Outside of this, I would expect any major GBP movement to be driven by the looming threat of further restrictions, potentially reducing the number of family members round the table at Christmas. Turkey sandwiches for weeks for some maybe.

Friday sees bank holidays in some parts of Europe and also the US, so any upcoming trades are best wrapped up in the early part of the week. The Aston offices remain open throughout the festive period, only closed over the weekends (as usual) and the UK bank holidays as per below:

Monday 27th December 2021 – CLOSED

Tuesday 28th December 2021 – CLOSED

Monday 3rd January 2022 – CLOSED

After a turbulent 2021, the team at Aston wishes you a Merry Christmas. Hopefully we see a return to normality soon in 2022 for one and all.

Enjoy the festive break and stay safe.