An action-packed few days

Caution is once again evident in equity markets on Wednesday as we await the final Fed rate decision of the year.

Once again we find ourselves in an environment in which investors have perhaps got carried away with some early promising reports on the severity of the omicron variant and have not fully appreciated the downside economic risks facing the global economy.

Central banks have little choice but to start tightening monetary policy in the majority of cases, as inflation continues to rise to uncomfortable levels, become more widespread, and show signs of becoming more permanent. Omicron posing a greater threat and forcing restrictions may delay the inevitable but not for long as policymakers can’t afford to be complacent.

The Fed is not likely to hesitate following its meeting today and is widely expected to accelerate the tapering of its asset purchases, allowing for rate hikes to start in the second quarter. It could be argued that it’s taken longer than it should have but policymakers are finally coming around to the market’s way of thinking and rate hikes are not far away.

The retail sales data for November won’t deter the Fed, with consumer spending more broadly remaining strong and the data perhaps signalling that purchases were brought forward as a result of supply concerns. The consumer remains in a strong position going into the new year and today’s report won’t be a cause for concern.

UK inflation hits decade high ahead of BoE meeting

The UK data this week highlights exactly why policymakers are being forced to withdraw stimulus earlier than they’d like and at a time of significant uncertainty around the variant. Not only are inflationary pressures accelerating faster than they anticipated and becoming more widespread, but an ever-tightening labour market is chipping away at the argument that it’s only temporary.

Odds on the Bank of England to raise rates tomorrow have increased following the data this week, although the consensus view remains that it will refrain due to the significant amount of uncertainty that omicron is creating as restrictions are reimposed. By February, the MPC will have much more data to hand and the booster program will have had time to improve the nation’s resistance to the virus. It certainly won’t be easy, but it may be sensible for policymakers to turn a blind eye to decade-high inflation this week.

Santa rally for bitcoin?

Bitcoin has also been relatively steady recently, albeit with a slight bearish bias as it struggles to generate any momentum above USD 50,000. It slipped below USD 47,000 earlier this week but quickly found its feet again and, despite being above here once more, is off a little today. Perhaps there is an eye on the Fed meeting here as well, with the crypto-crowd hoping for a continuation of inflationary loose policy, which they’ve long believed is bullish for the cryptocurrency.  I guess we’ll soon see if bitcoin can look forward to a Santa rally of its own.

For a look at all of today’s economic events, check out our economic calendar:

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary.

His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News.

Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.