Meetings of the Bank of England, the European Central Bank and, above all, the US Federal Reserve are likely to dominate events on the financial markets this week.
Inflation in the US has reached its highest level in nearly 40 years, and the Federal Reserve is no longer insisting that it is only temporary. Jerome Powell, the Fed chairman, recently raised the issue of a faster end to the asset purchase program (QE).
Two sharp cuts - $30 billion each?
In the absence of opposition from other members of the FOMC committee and despite the uncertainty surrounding the emergence of the omicron option, this week the Fed is likely to announce an acceleration of QE tapering. The consensus is for a $30 billion reduction in January and another $30 billion in February, with no further purchases in March and beyond.
As for interest rates, the Fed is also likely to signal earlier action. As recently as March, individual members' projections suggested that an interest rate hike was unlikely until 2024; the June update moved that to 2023, and in September the median expectation shifted to 2022. The projection update is expected to show that the Federal Reserve may move toward two hikes next year.
In the UK, a hike expected in February
The Bank of England is likely to hold off on an interest rate hike again as the omicron raises concerns and uncertainty about the economic situation. However, assuming that the new mutation of the coronavirus does not bring a sharp slowdown in economic growth, it is likely that policymakers will raise rates in February.
Bank officials continue to express concern about inflation through the impact on the supply chain recovery. Much depends on the impact of the virus on January GDP - and if there are further constraints, the bank may delay the hike even further, until 2022. Still, the BoE's direction is fairly clear. Two interest rate hikes are expected next year.
ECB reluctant
The European Central Bank is unlikely to rush into interest rate hikes either, and markets are hardly pricing them in. For the ECB, the key task may be to modify the asset purchase program that was launched for the pandemic.
It seems that no key decisions will be made at the upcoming ECB meeting. Hence, the market's attention may be focused on the actions of the Federal Reserve this week, as this is where most of the action may take place.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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