"The Omicron variant Coronavirus is spreading to such an extent that the Government is unable to provide any guarantee that it will not need to introduce tighter restrictions on the public, although following yesterday’s meeting of the Cabinet it is understood that nothing is planned before the Christmas holiday.

Following last week’s interest rate hike with the likelihood that further increases will be needed in the New Year, the focus has switched to the Chancellor of the Exchequer, Rishi Sunak, and what support he can provide for several sectors of the economy that are struggling with both being able to staff their premises and also footfall at their busiest time of the year.

The CEO of one major hospitality company called on Sunak yesterday to provide support for the sector given the fact that several of his outlets are being forced to close.

Sunak will need to be careful not to set a dangerous precedent where Government support becomes a crutch for ailing businesses.

It is clear that the pace at which Omicron has risen over the past month has come as a surprise to both the Government and the scientific community.

"

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"The Bank of England’s rate setting Monetary Policy committee will vote later this morning on whether to hike interest rates as inflation in the UK hits a ten year high of 5.1%.

Producer prices, the cost of goods at the factory gate, also hit a high in November, reaching 14.3%, up from 13.7%. This data provides a clue to the future path of consumer price inflation.

A month ago, the outcome of today’s meeting would have been an easy decision.

The Bank’s Governor following the previous meeting had commented that the MPC had decided to leave rates unchanged until they saw the effect of the withdrawal of the Government’s furlough support scheme, until considering a rate increase.

Given the encouraging employment report that was published earlier in the week, it would seem that condition had been met, but the rapid increase in the number of cases of the Omicron Variant has again placed a rate hike in doubt.

"

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"If the Monetary Policy Committee was waiting for the employment data before making up its collective mind over tightening monetary policy, yesterday’s November report should have eased any concerns.

The unemployment rate fell to 4.2% from 4.3% in October.

Despite the fall in the unemployment rate, unfilled vacancies also reached a record high. The end of the Government’s furlough scheme appears to have had negligible effect on hiring, with 257k new jobs created, the single biggest monthly rise since 2014.

One of the concerns that had been voiced by members of the MPC was what effect the removal of the furlough scheme would have. It was feared that many firms were retaining staff simply because of the support they were receiving, but those fears now appear to be unfounded.

While market expectations of a rise in interest rates would have increased, the fears of the effect of the Omicron Variant on output lingers.

"

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"The UK is again in the midst of another potential Coronavirus crisis. The Prime Minister and Health Minister have both commented that the country faces a tidal wave of infections, while speculation grows that another lockdown may become necessary.

There has been criticism of the decision that was made in the Autumn to relax the restrictions of wearing masks on public transport and in shops.

This is eminently politically driven, since while it was likely that there would be another variant of the virus, at the time the decision was made, the delta variant was under control and those members of the public who had received two doses of the vaccine were well protected.

The country had its first death from the Omicron Variant yesterday, while Sajid Javid announced that the new variant accounts for 40% of new cases in the capital.

The outlook for the economy is again clouded by the prospect of further restrictions. While it remains unlikely for now, that there will be a huge spike in deaths, or even hospitalizations, those infected will have to be isolated and that is sure to have an effect on the economy.

"

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"Renowned economist Jim O’Neill spoke last week of his confusion over the path of inflation in the UK. It is simply unclear whether inflation in the UK is temporary or not.

This means that predicting how the Bank of England will manage monetary policy in 2022 is impossible to predict.

O’Neill believes that the era of loose monetary policy that actually preceded the Coronavirus Pandemic has run its course and the time is fast approaching when it needs to be tightened up.

The pace of the recovery in many developed nations, coupled with supply chain shocks, has led to the current inflationary spike, but the generosity of Central banks is no longer applicable.

There is no sign of any concerted cooperation with G20 to ensure that the global economy emerges from the pandemic able to promote activity elsewhere. This was a feature of the policies adopted in the period from 2008-2010.

"

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"Bank of England Governor Andrew Bailey is being coy about what will happen at next week’s MPC meeting.

This is firstly due to the fact that he was accused of misleading markets in the run-up to the most recent meeting and more importantly, not only is he unable to gauge the mood of his colleagues, but he is unsure of his own vote.

There are merits to trying to take back control of inflation by raising interest rates, a move that would signal the end of historically dovish monetary policy but could see several areas of the economy suffer.

Equity markets would most likely correct, the property market would experience a significant slowdown, although it has weathered the withdrawal of Government support well. Should the logistics issues and shortages continue well into the first quarter, such a move may now be considered premature.

Prime Minister Boris Johnson is facing further pressure from within his own Party over revelations about last year’s Downing Street Festivities while the country was in full lockdown. The critical issue of whether he knew what went on under his own roof remains unclear.

"

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"Next week’s MPC meeting will be impossible to call as the effect of the growing number of cases of the Omicron variant cast doubts in the minds of its members.

The mood was summed up not by the concerns voiced by Deputy Governor Ben Broadbent but by his general mood of helplessness.

His attitude illustrated perfectly the fact that a decision that binds the Bank for any period of time longer than a month will be impossible to make.

There have been differing views expressed by the scientific community globally about the variant. Some say that it is more virulent than the Delta variant, some say less, some say the current vaccines will work, others say they will need to be tweaked.

The reactions that have been seen in several cities across Europe to the return of lockdown measures show just how tired and yet easily incensed the public are becoming.

"

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

Deputy Bank of England Governor Ben Broadbent spoke yesterday of his belief that inflation in the UK will reach 5% by the end of the first quarter of next year.

He sees a tightening of the UK labour market as the main cause of the rise. Echoing the thoughts of several FOMC members, Broadbent commented that the bank will need to be agile in its treatment of growth and inflation and be prepared to act at every meeting.

A survey conducted by the Financial Times and published yesterday concluded that the majority of economists and traders do not consider a rate hike to be the outcome of next week’s MPC meeting.

More time needs to be taken to evaluate the risks to the economy of the new Coronavirus Variant.

Indeed, Broadbent spoke yesterday of his uncertainty about how to vote at the meeting for this reason.

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"When the first two lockdowns were introduced, the Government was heavily criticized for dithering and not being decisive in its actions. As concerns grow that the Omicron variant could be more resistant to vaccines than anything that has come before, there are questions about whether the actions that have been taken so far have been driven by panic and fear rather than considered scientific reasons.

The country is still some way away from locking down, as has been seen in several European nations, and it will still be a few weeks before the true situation is known.

The travel sector had just been able to start to look forward to 2022 with some sense of optimism when the requirement for travellers to undertake a PCR test before returning to the UK and there are thousands of Christmas getaways that have already been cancelled.

The Bank of England’s Monetary Policy Committee faces a far trickier task at its meeting next week than it had originally expected. According to the Bank’s Chief Economist, the burden of proof rested with those who want to leave rates unchanged.

Huw Pill voted to leave rates unchanged at last month's meeting but was leaning towards a hike last week. Now that looks less likely. However, if the Omicron variant is proven to be similar in makeup to the Delta variant, there could easily be an intra-meeting hike agreed next week, although the bank is unlikely to confirm such a measure.

"

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.

"Household savings rates have again reached levels that were first seen over a year ago as hopes grow that they will provide a cushion for middle income families who face enduring the most of higher expenditures over the next twelve months.

House prices and pension pots have both risen significantly, despite the economy not yet at its pre-Pandemic Level. A rise of 8.4% last year compares to a rise of 3.3% in 2019. The rise is double the average over the past ten years.

The effect of inflation on savings will moderate the rise in the next twelve months, while asset prices, particularly house prices, level off.

The much-vaunted trade deal between the UK and U.S. is still not agreed, as President Biden is concerned over the situation over the Northern Ireland Protocol and what the outcome of invoking Article Sixteen would have on the peace process.

While Biden doesn’t wish to hold the deal over the heads of the British Government, he is concerned about recent developments.

"

Beyond Currency Market Commentary:

Aims to provide deep insights into the political and economic events worldwide that can cause currencies to change and how this can affect your FX Exposure.