The Bank of England steps into the spotlight

The spotlight switches across the Atlantic for part of this week with both the European Central Bank and the Bank of England both meeting, with the Old Lady expected to move the base rate up to 0.5%.

As last week started, it gave a hint to the world of the volatility in store as investors realised that the days of cheap and easy money in the US were well and truly ending. With stock markets moving in ways that they have rarely done in the last forty years, risk sentiment took a turn for the worse, and as it did, the dollar became even more attractive. The worst fears of many investors became a reality when the Chairman of the Federal Reserve appeared after their monthly meeting and gave an uber hawkish press conference. He didn’t actually commit to any immediate moves but made it patently clear that controlling inflation was now their uppermost priority. With analysts predicting anything from 3 to 7 moves up in interest rates this year, it was no wonder that the dollar gained ground in particular against the euro. Incidentally, this would be their first back-to-back move since June 2004.

After their meetings, both on Thursday, the US Labour Department will release its monthly Non-Farm Payroll report, often a market-moving event. Unusually, there is also great political drama that could cause even greater market mayhem. With Russia still massing troops on the border with Ukraine, the euro will remain pressured, especially with the threat to its gas supplies from Russia. In the UK, Boris Johnson faces another problematic week as he waits, as the rest of parliament does, for the publication of the Sue Gray report into “partygate”. All in all, another exciting week in prospect.

Sterling in common with most, if not all, G10 currencies suffered at the hands of King dollar last week. However, it was not all doom and gloom as it regained almost all of its recent losses against the euro. And this morning, it is back knocking on the door of its best levels since Brexit against the single currency. Attention will turn to Threadneedle week at lunchtime on Thursday when Bank of England Governor Andrew Bailey will announce the decisions of the Monetary Policy Committee and the rationale behind them. With the threat of Omicron receding and society opening up, the UK looks like it’s returning to normal. Unfortunately, the flip side of the recovery has been the jump in inflation to levels last seen in the 1980s. Unemployment, which the Bank had been concerned about, is looking under control, giving the bank comfort for any hike in the base rate. As we said earlier, it is now widely expected that the base rate will be increased to .5%, which the money markets are predicting will be the first of several moves this year before it peaks at just below an unlikely 1.5%. The Bank may also adjust its Quantitative easing policy and possibly allude to reversing it with quantitative tightening as it changes its view on inflation and wages.EUR
The euro was under the cosh again last week as the policy divergence between the European Central Bank and its main rivals was laid bare by the hawkish statements of Fed Chairman Jerome Powell. This week could be a big week for the euro with the publication of the 4th Quarter’s Gross Domestic Product later this morning and Inflation data before the European Central Bank meets on Thursday. With the eurozone still way behind the UK and US, no great shocks are expected from the ECB. Indeed, the most interesting part will be the language that its president Christine Lagarde chooses to use in her press conference after the meeting. Although inflation isn’t rising as sharply in the eurozone as it is elsewhere, that’s not to say that there is not a growing issue causing a divide in the council. Her challenge will be to talk tough on inflation to appease the hawks whilst reassuring the doves on the council that nothing dramatic is planned. Whilst the ECB finds itself in this fix, the single currency’s problems are likely to mount against those currencies that are already tightening policy. Indeed, some expect the single currency to test its lowest levels against the dollar and sterling.

At long last, after a period of denial Jerome Powell and the other governors of the Federal Reserve seem to be taking decisive action on inflation. This week focus will switch from inflation to the less thorny problem of employment with this month’s publication of Non-Farm payrolls on Friday. With Omicron still disrupting large swathes of the economy, expectations are for a low gain in employment of about 100,000. It must be remembered that there are about 10 million vacancies, and one month’s figures are unlikely to upset the chain of events to higher interest rates that Jerome Powell has started. The ISM Manufacturing Purchasing Managers Indexes are due out tomorrow, the ADP white-collar labour figures on Wednesday, the weekly jobless total, and the Markit Purchasing Managers Indexes on Thursday to digest. As usual, after a Federal Open Market Committee meeting, several governors of the Fed are expected to speak and air their views on inflation.Scandinavia
The Swedish krona continued to weaken throughout last week and is now once again at levels last seen in 2020 against the euro and sterling. With no important data releases scheduled for this week but for the Services PMI, the krona will once again be left to the mercy of the markets with very little to defend itself. Tensions over Ukraine are expected to be the main influencer.
With gas prices soaring, the Norwegian krone has been able to stand its ground against most other G10 currencies. This week sees no data releases that are considered significant; however, we will watch the House Price Index release to see whether last year’s two rate hikes have managed to put a dent in the booming property market.

All eyes on the US Federal Reserve

This week we have the first opportunity of the year for a central bank to signal its intent to control inflation when the American Federal Reserve hold their Open Market Committee meeting.

Committee members, including Chairman Jerome Powell, have been increasingly vocal over their concerns about rising prices. It is expected that some action will be taken after the meeting, possibly including a surprise rate rise. There are also preliminary Purchasing Managers Indexes to digest and the ongoing geopolitical worries to contend with, primarily on Ukraine’s border, where Russia maintains a significant troop presence. In the UK, the so-called ”party gate“ report by Sue Gray is expected to be published and may determine the future of Boris Johnson. Elsewhere in Europe, politics is also starting to play an increasingly important role in the euro’s direction. France and Italy face elections whilst the Green Party in Germany is embroiled in an investigation over Covid related financial impropriety.


The pound touched its highest level against the single currency since June 2016 before falling back to finish slightly lower on the week. Against the dollar, it also ended a volatile week on the back foot. Sterling was helped by the prospect of the Bank of England raising rates at its next meeting after a higher than expected inflation figure was announced combined with a solid employment report. Regardless of the outcome of the “partygate” investigation into the Prime Minister’s behaviour, the main focus for sterling will be the Bank of England’s Monetary Policy Committee meeting next week. Some fresh insight into the UK-EU Brexit negotiations may also be after officials meet today. The preliminary (flash) Purchasing Manager’s Indexes for Manufacturing and Services, published as this note lands in your inbox, are the only top-tier data scheduled this week.

After a week where the European Central Bank (ECB) did nothing to dispel the perception that they won’t be changing their opinion that the current bout of inflation is transitory or moving interest rates up any time soon, the euro ended lower again. Until the ECB decides to start thinking about increasing interest rates, the single currency will continue to underperform. Also of concern to euro watchers are the massed troops on its Eastern border and the very real threat of Russia invading Ukraine. The data docket is a bit busier this week than recently, starting today with the preliminary Purchasing Managers Indexes for Germany, France, and the Eurozone published this morning. Tomorrow If
o will release their Business Climate Condition survey. The final reports for the week are the Eurozone Business Confidence, Economic Sentiment and Consumer Confidence reports published on Friday.


The financial world will turn its ears and eyes towards the US on Wednesday afternoon and early evening when the Federal Reserve will conclude their first meeting of the year. With the economy having regained all of its lost output, inflation running at its highest rate for 40 years and the unemployment rate dropping below 4%, it is hard not to argue that the US economy has returned to normal. Most analysts are forecasting that the Fed will now start tightening policy, possibly with an immediate end to its policy of asset purchasing through its Quantitative Easing program. There are also some thoughts that the Fed will increase interest rates by .5% which could rapidly appreciate the dollar. Building up to Wednesday’s meeting and its subsequent press conference, the market is likely to remain volatile. Aside from the Federal Reserve meeting, the US has its flash PMIs published later today and on Thursday, Durable Goods, Weekly Jobless Claims and 4th Quarter GDP. A busy data week comes to a close on Friday with December’s Personal Income, Personal Consumption and, most importantly, its Personal Consumption Expenditure Index.


Last week the Swedish krona traded slightly outside the January range against the euro and sterling. This was mainly due to stock market sell-offs affecting beta currencies and general all-around sterling strength. This week the latest PPI figure is released on Wednesday, together with the Trade Balance. Friday sees a bonanza of data being released, and we will pay the most attention to the latest Gross Domestic Product figures. On a Quarter-On-Quarter basis, the Nordic region’s largest economy is expected to have grown 1.3%, and Unemployment is predicted to be steady at 7.5%. Over in Norway, Norges Bank Governor Olsen offered no surprises as he kept rates steady and did not offer much in terms of future guidance either. This week the December unemployment rate is released on Thursday, which is expected to come in at 3.6%.