Sterling continued to strengthen after the latest UK inflation data with markets noting that pressure for a Bank of England tightening had increased and there was also some speculation that the central bank could decide to make a move this week despite major uncertainty surrounding the Omicron variant. Risk appetite, however, remained fragile which curbed potential support and fears over the Omicron variant were also significant in sapping sustained support. Sterling drifted lower against the dollar and dipped to test 2021 lows immediately after the decision before rallying as the US currency retreated.
Sterling was unable to make further headway on Thursday with expectations that the Bank of England would decide against a move to raise interest rates this month, although there will be very choppy trading after the decision.
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Bank of England Rate Decision Prev 0.1% Exp 0.1%
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The Euro was unable to make any headway and drifted lower into the European close as the dollar maintained a firm tone ahead of the Federal Reserve policy decision.
Today we have the the ECB rate decision. Rates are expected to remain the same at 0% but all eyes will be on comments after the announcement as markets look for an insight to what measures will be implemented to aid the single currency union.
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US retail sales increased 0.3% for November after a revised 1.8% increase the previous month and below consensus forecasts of 0.8%. Underlying sales increased 0.3% and below market expectations of a 0.9% increase. The control group recorded a 0.1% decline after an October increase of 1.8% with limited market impact. The Federal Reserve held interest rates in the 0.00-0.25% range at the latest policy meeting. It announced that the pace of tapering of bond purchases would be doubled to $30bn per month from January which would result in purchases being completed in March if there are no further changes.
The dollar strengthened after the tapering announcement and revised economic projections as markets priced in an earlier rate hike. Chair Powell stated that the economy was strong enough to cope with the faster pace of tapering and the Fed remains committed to preventing high inflation with limits over the ability to push for maximum employment given the need to control inflation pressures. He also stated that there would not be a rate increase while the tapering process is underway, although there could be only a short gap after tapering is concluded. The statement was broadly optimistic over the outlook despite uncertainty.
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