The forecast of the ECB is likely to reveal that inflation will fall below the 2% target only by 2023 and will remain there in 2024. Therefore, today, we may not expect ECB President Christine Lagarde to announce a rapid increase in interest rates and to discuss when the emergency program should end.
Uncertainty surrounds the ECB's policy decision.
Although consumer prices are projected to be higher than a 1.7% forecast of the European regulator made in September and above the target of 2%, their growth is expected to slow down.
The ECB will present its 2024 economic forecast today, which is likely to determine the course of the regulator's monetary policy after the coronavirus pandemic. This is not going to be an official forecast. Therefore, we will have to wait until the Governing Council publishes an official report after the policy decision is announced. Back in September, the ECB expected inflation to slow down to 1.5% in 2023, which is highly unlikely to happen.
The upcoming meeting may well become the most significant one since Lagarde began her tenure as president of the European Central Bank in 2019. Many economists are now arguing about changes in the asset purchase program that the regulator initiated even before the outbreak of the coronavirus pandemic.
The ECB is likely to continue its dovish policy stance, which means we may expect the first interest rate hike as early as 2023. The futures market gives a 0.1% likelihood of the first rate hike in December 2022. At the same time, the deposit rate, which is currently at -0.5%, may rise to zero only in six years.
In her recent speeches, ECB President Christine Lagarde tried to persuade investors not to rely on earlier tightening of monetary policy, insisting that the current surge in inflation to 4.9% was just transitory. At the same time, her colleagues at Austria's central bank and the Deutsche Bundesbank argue that monetary policy needs changes in order to curb inflation hikes that pose downside risks to economic growth in the eurozone.
Nevertheless, Lagarde's stance will depend solely on the inflation forecast released today and how low inflation could be than the target rate. The closer it gets to 2%, the easier it is for hawkish policymakers to emphasize the threat of increased inflationary pressure.
Technical analysis of EUR/USD
Buyers were strong enough to protect the level of 1.1230 and push the quote above 1.1276 after the FOMC meeting. They are currently trying to break the nearest resistance around 1.1300. If so, the price is likely to soar to 1.1325 and 1.1355. The pair is likely to come under pressure in case of a fall below 1.1275. A breakout of support at 1.1255 could lead to a mass sell-off to the area of 1.1230 and 1.1200.
UK inflation is at its highest level in over a decade.
Inflation in the United Kingdom hit its highest level in more than a decade in November, exerting pressure on the pound sterling. Yesterday, the British currency was able to retrace upward briefly. Amid rising inflation, the Bank of England may well alter its dovish stance on monetary policy, especially amid yet another spike in coronavirus cases.
According to the macroeconomic data published on Wednesday, the consumer price inflation rate rose to 5.1% due to increasing prices for clothing, motor fuels, and second-hand cars. The core CPI in the United Kingdom, which excludes more volatile energy, food, alcohol, and tobacco prices, grew to 4.0% in November, the highest since 1992. In October, the core CPI climbed 4.0%. It sored by 3.1 percentage points in just 4 months, which is the highest increase on record.
If it had not been for the threat posed by the Omicron variant, as well as for a stronger labor market, we would have expected the Bank of England to act today. By the way, Governor Andrew Bailey hinted at that back in the summer. However, due to new restrictions from the government, the monetary policy committee decided to postpone the decision until February next year.
The main upward pressure on inflation came from the cost of transport and clothing. Prices for clothing and footwear rose by 1.1% compared with a 2.7% fall a year ago. Petrol and diesel prices climbed 5.1%, while prices for second-hand cars increased 3.1%.
Despite the BoE's dovish rhetoric, after yesterday's data, the likelihood of a rate hike increased by 0.8% versus 0.5% on Tuesday. Traders also expect the benchmark rate to rise to 1% in September next year. As a result, government bond prices fell and the yield on 10-year bonds rose by 3.1 basis points to 0.752%.
In the light of the recent data, the BoE should raise interest rates earlier than planned, economists say. Although the labor market is recovering, the tension there is quite high. Due to accelerating inflation, there is a risk that expectations of a further increase in prices will become unjustified. If so, this could lead to prolonged inflation. However, most experts agree that the central bank is unlikely to announce a rate hike in the upcoming meeting, citing uncertainty over the latest Omicron strain.
In its review of the UK economy, the International Monetary Fund said this week that inflation could rise to 5.5% as early as next spring, warning the Bank of England against inaction. IMF experts are concerned that price hikes may soon affect earnings, so inflation will not be able to return to the 2% target. According to the recent data, average weekly earnings excluding bonuses in the UK grew by 4.3% y/y in the three months to October.
Concerns are rising that inflation is increasing faster than earnings. If this continues, the UK risks facing stagflation, which means that household earnings will be lower than the actual inflation rate. This could lead to a decrease in consumer spending and general business activity, which worries the Bank of England.
Technical analysis of GBP/USD
A correction is likely to start if bears consolidate above 1.3220. The last support level is seen at 1.3185. The quote may break through support only in the case of a dovish Bank of England. A breakout above 1.3255 may trigger stop-loss orders of sellers, which may lead to a price increase to the highs of 1.3290 and 1.3320. The hawkish comments of Andrew Bailey could push the pound to 1.3350 and 1.3390.