Traditionally, December is a relatively illiquid month for the markets- but at the moment, with everything going on- we are seeing plenty of market movement on both the FX and stock markets due to the pandemic and inflation. Unfortunately, depending on what you are trading- this may not be a good thing.

GBPUSD has seen a drop from 1.38 down to 1.32 since October due to significant USD strength- however, GBPEUR has moved in the exact opposite direction with Pound to Euro exchange rates seeing highs of 1.19 in November. Traders are now in a pretty tough situation with the next week really relying on what the Central Banks do and what their forward guidance is going to be- this will give us an idea of how this year will end and how Q1 in 2022 will look.

Now, before we discuss Central Banks- we have a couple of data releases of interest before which will undoubtedly be catalysts for the BoE decision this week- and these are employment and CPI figures in the UK. Rising inflation is no secret, and with the U.S release last week of 6.8% YoY CPI- we are expecting high CPI again in the UK (One main reason for the BoE to raise rates). As far as employment is concerned, we are expecting strong numbers again in the UK, which again should back the case for an interest rate hike by the BoE- so now the question is- what will Governor Bailey do?

The markets had priced in a BoE interest rate hike for December until the release of a new Covid Variant entered the news wires a few weeks ago, and now the sudden uncertainty has pushed back these expectations- so the market is now pricing in a hike for February. The issue with “pricing in” is we are just guessing- the most recent news about the Omicron variant is that the booster jab works on it- and hopefully does not mean lockdowns in the UK- which should give the BoE a clear runway to look at hikes, so I personally would not rule out a surprise rate hike this week- though chances are slim, it would make total sense and give Sterling exchange rates a much-needed boost. However, after PM Boris Johnson’s speech on Sunday evening saying that the UK is facing a “tidal wave” of Omicron infections- it has made a rate hike this week very unlikely.

Now looking across the pond- the major event is the Fed meeting – now we are NOT expecting any rate hikes from the Fed this month, however, the key subject is still inflation and what they are doing about it. Recently they announced tapering of asset purchases, and the expectation is Fed Chair Powell will announce tapering to be sped up a little so they can look at raising rates in 2022- this will strengthen the US Dollar and maybe push GBPUSD a little lower if we see this- however it does come down to how much of a threat the U.S views the Omicron variant. It may pay for Central Bankers to wait for one month before they make any major policy changes.