Following Powell’s testimony to the US Treasury, we think that this is now largely expected by the market, and the reaction in the dollar to the above would be neutral-to-mildly positive. No change to tapering would be a significant disappointment for markets and would almost certainly trigger a sharp sell-off in the dollar. A more modest acceleration in the pace of tapering would also be greeted negatively by investors, and the dollar would again likely sell-off, in our view, albeit to a lesser extent. Markets will also be paying close attention to the updated ‘dot plot’. We expect it to show at least two hikes are on the cards next year – any less would be a massive disappointment for markets and would likely weigh on the greenback.

Then, on Thursday afternoon, both the Bank of England and European Central Bank will be announcing their latest policy decisions. Expectations for a December interest rate hike from the BoE have largely evaporated following the omicron news, which has undoubtedly worsened the outlook for the UK economy. Omicron is set to become the dominant strain in London in the next day or two, and the government is frantically rushing to ramp up the booster vaccination programme amid what the Prime Minister has labelled a ‘tidal wave’ of new cases. A third jab appears to be absolutely crucial in fending off infection and illness in omicron. Fortunately, the UK is doing rather well in this regard (34 booster doses administered per 100 people, versus around 16 in the US and Euro Area). This progress is, however, highly unlikely to convince enough MPC members to vote in favour of a hike this week and we find it difficult to see any additional members voting for higher rates.

This week’s ECB meeting is also shaping up to be a rather important one. The bank is expected to announce it will be ending its PEPP programme as planned in March. Probably the key question for investors will be whether or not the bank increases its APP in order to smooth the transition away from its accommodative policy. Market participants will also be paying close attention to Lagarde’s press conference for her comments on both omicron and inflation. Given the ongoing virus risks, we think that a hawkish tilt is unlikely, and expect Lagarde to once again push back on expectations for rate hikes in 2022, which may present a downside risk to the euro.

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