Central bankers set the tone
As expected, Inflation worries came to the fore in the UK last week after the Consumer Price Index jumped to 4.2%, somewhat higher than many commentators had been forecasting. To the average consumer, and with petrol now costing nearly £1.50 a litre in the UK, this was no surprise. Also released were the latest unemployment figures, which showed no ill effects from the ending of the furlough support and reported a healthy recovery in the jobs market. A move upwards in the base rate now looks slightly more likely than not after the Bank of England's next meeting just prior to Christmas. Also helping sterling was the lack of news from the ongoing discussions over the implementation of the Brexit agreement.
The euro looks set to remain under further selling pressure this week, especially against the dollar, as the Bank of England and the Federal Reserve look set to tighten policy. Indeed, Richard Clarida, vice-chairman of the Federal Reserve, raised the prospect of quickening the pace of their tapering operation during a speech on Friday. Worsening the market's perception of the euro is the continuing climb in Covid infections and the subsequent actual or potential lockdowns in Northern Europe, including Austria, Holland and Germany. Adding to the EU's problems, energy prices are continuing to climb, and the situation on Poland's border with Belarus shows only the slightest sign of easing. This week is a holiday-shortened week, with the US celebrating its annual Thanksgiving Day holiday on Thursday, which will be extended into an extra-long weekend for many.
With appeasing noises coming from both the EU and UK's negotiating teams, there is some hope that progress is being made on the implementation of the Brexit deal. If this is born in the next few days, sterling would get a leg up and achieve its highest level for some years. However, with the Government continuing to make cautionary noises over the spread of Covid sterling may tread water over the next few trading sessions.
On Friday, Huw Pill, chief economist from the Bank of England, sent out mixed messages on interest rates. Some commentators took his comments to be hawkish and others dovish; the Governor of the Bank was also guarded over interest rates in his interview with the Sunday Times. However, after the BoE encouraged the market to expect a rise last month, their views will be taken with a healthy pinch of salt. After last week's plethora of data, the docket is a lot less crowded this week, with only tomorrow's Markit's Services and Manufacturing Indexes of any real consequence. It looks relatively peaceful on the speech front, with just the Bank of England's Jonathan Haskel set to appear tomorrow and Huw Pill on Friday afternoon.
The euro looks set for another week of travails against a background of increasing lockdowns and anti-lockdown protests. Any thoughts of tightening, not that there were that many, have been placed firmly on the back burner as the fourth wave of the pandemic wreaks its havoc across much of Northern Europe. In the week ahead, we will watch the situation on the Polish border with Belarus as closely as the scheduled economic data. The data week starts today with the release of European Consumer Confidence.
Markit will release their Manufacturing, Services and Composite Purchasing Managers Indexes in common with the developed world tomorrow. Wednesday Business Climate data is scheduled from the German IFO, and the week closes with the GfK Confidence Survey for the same country. The most interesting data scheduled that may move the market are the notes from the last European Central Bank meeting released on Thursday. These notes may reveal the extent of the split between hawks and doves on the council. There are several speakers from the ECB, with Fabio Panetta taking to the rostrum on Wednesday. On Thursday, Frank Eledrson, Christine Lagarde and the increasingly hawkish Isabel Schnabel are scheduled.
The dollar had a strong week, holding on to most of the gains that it made in the aftermath of its recent surge after the 6.2% print in the Consumer Price Index. This rally was endorsed by the strong Retail Sales figures and the growing band of speakers from the Federal Reserve acknowledging that the inflation spurt is not transitory. Having rallied strongly over the last two weeks, there may be some profit-taking ahead of the Thanksgiving Day long weekend. As no figures are released on Thursday, this week's data will be crammed into Tuesday and Wednesday. Tuesday, as with the rest of the developed world, Markit will release its Manufacturing, Services and Composite Indexes.
Wednesday is set to be the busiest session of the week with Durable Goods orders, Weekly Jobless, Core Personal Consumption (PCE), Personal Spending and Preliminary Third Quarter Gross Domestic Product. The pick of the numbers will be the Core PCE which is one of the Federal Reserve's favoured measures of inflation, and it is expected to come in way higher than the 2% target. The minutes from the Federal Reserve's last meeting are also released. They decided at the meeting to taper, and the minutes may shed light on the hurdles needed before any further tapering is enacted. All in all, enough to give the market indigestion before a Turkey is on the table!
The Swedish Krona was sold off and has now weakened 8% against the US Dollar this year. The market is now expecting a rate hike from the Riksbank sometime in 2024, which is much later than most other G10 countries. On Thursday, Governor Ingves will give a press conference after he announces the latest policy decision, and market participants will look for clues confirming the 2024 timeline. The latest PPI figures are released on Thursday too.
The Norwegian Krone took the crown as the worst-performing G10 currency last week and, with no major data releases scheduled for this week, will be very much at the mercy of other currencies. The next rate decision from Norges Bank is scheduled for December and the market is expecting Governor Olsen to once again raise the base rate to stop inflation from spiralling out of control.