Omicron, however, has the potential to magnify the downward risks facing the economy. The Personal Consumption Expenditures (PCE) Prices Index and the core PCE Prices Index both registered new highs in October. During the FOMC meeting in December, it was decided to double the pace of monthly bond purchases to USD 30 billion in advance of the end of the asset purchase program in March 2022, which leaves room for a modest interest rate hike 2022.
When discussing inflation, the Fed retired the term transitory. As a result of the dot plot revisions, there will be three increases in 2022 and 2023 and two increases in 2024. At the beginning of 2024, interest rates are still projected to be lower than the long-term equilibrium rate, suggesting that the pace of rate increases will be moderate. In the absence of continued inflationary pressure, the Fed will likely raise interest rates for the first time around mid-2022 and then implement two 0.25 percent rate hikes throughout this year.
As a result of the Omicron variant, the Eurozone has experienced a significant hindrance to its recovery, and therefore restrictive measures have been implemented across many countries to prevent epidemics. As a result of these actions, the economy is expected to exhibit a short-term slowdown.
However, after the pandemic has been brought under control, it is expected to resume its growth momentum. The annualized growth of the Eurozone’s GDP in Q2 and Q3 of 2021 has reached a record high for the past two decades. The reason for this is a low base in 2020 and the Pandemic Emergency Purchase Program (PEPP) enacted by the European Central Bank.
The central bank estimated that the annualized inflation rate would reach a record high in November 2021. Since the European Central Bank has reiterated its stance of maintaining monetary easing, the pace of purchases of assets is likely to slow, but it is not expected that interest rates will rise anytime soon. There remains sufficient liquidity, and the economy is supported to some extent. The Eurozone’s growth will slow down, however, as the low-base effects diminish as inflation undermines the economy.
Growth of the British economy in October slowed to 0.1 percent, the lowest in three months, suggesting a slowdown in economic expansion. In the U.K., economic performance is expected to be dominated by the Omicron variant over the next two to three quarters. Economic activities, in particular those in the service sector, will suffer adverse effects as a result of the activation of Plan B for epidemic prevention and control.
Based on preliminary analysis, the U.K. economic situation is likely to worsen. There is a certain amount of inflationary pressure resulting from the Omicron variant. The Bank of England expects that the price index will peak at 6% this spring.
Chinese economic data released in November 2021 showed both positive and negative signs. It is noteworthy that the value added to industrial activities grew by 3.8% on a year-over-year basis and by 0.37% on a month-over-month basis; however, the growth rate remains below the historical average. The consumer data was weakening due to the pandemic recurrence.
As evidenced by the growth rate of fixed-asset investment in November 2021, the decline in real estate investment has narrowed considerably, whereas the decline in infrastructure investment has widened. At the same time, trade data remained solid. During November, the CPI rose by 2.3% year-over-year and 0.4% month-over-month, primarily driven by increases in food and energy prices. In the next stage, it will be necessary to pay attention to upward price movements.
PPI has slowed to some degree as a result of the implementation of policies for ensuring supply and stabilizing prices, and it is expected to continue to decline year-over-year. It was reported in November that China’s outstanding total social financing (TSF) increased by 10.11% year-over-year to RMB 2.61 trillion. TSF’s growth can be attributed to the policies of ensuring supply, stabilizing prices, and easing real estate financing procedures showing signs of accelerated recovery. Considering the implications of the global health crisis pandemic, it is important to consider whether or not the current unstable level of economic equilibrium is already a new equilibrium.
According to the Central Economic Work Conference report, China’s economic growth is being challenged by four factors: shrinking demand, supply shock, weakening expectations, and overheating. Policymakers emphasized once again during the conference the need to center the policy discussion around economic development, and it is expected that the subsequent policies will provide more support to stabilizing growth. Our projections indicate that the macroeconomic situation will stabilize before a rebound occurs.
On precious metals, U.S. President Joe Biden announced that he would nominate Jerome Powell as chairman of the Federal Reserve in November 2021. Powell has since disassociated the term transitory from inflation and has emphasized hawkish signals that exceeded expectations. During the month, expectations of monetary tightening returned to the foreground while gold and silver prices declined from high levels of the range of oscillations. We believe the central conflict in the next stage will remain between market expectations for an increase in interest rates in 2022 and the Federal Reserve’s laggard position in the policy of monetary tightening.
It is expected that U.S. interest rates will gradually move towards market expectations within the next two quarters. Before the first rate hike, the precious metal market was under pressure, and there may only be a rebound after experiencing a bearish trend. As regards the crude oil market, it is anticipated to reach highs in January 2022. As a result of the significant oil-consuming countries continuing to utilize their strategic reserves, the crude supply is likely to increase in the near term, therefore placing pressure on oil prices.
Meanwhile, the market widely expects the negative impact of the Omicron variant to be limited, and the steady recovery of demand is expected to support oil prices. However, following a significant decline in crude oil prices in December 2021, the current price level is moving towards equilibrium and is expected to maintain an oscillating pattern of fluctuation. Receive latest price updates
Crude Oil: A bullish and a bearish trend coexist in crude oil prices, suggesting a high price trend is likely to persist
As we look back to the crude oil market in December 2021, prices showed an upward trend amid oscillations following sharp drops in November. Oil prices significantly declined due to the release of strategic reserves and the market’s concerns about the Omicron variant. These factors are still being factored into the market through the month of December. In December 2021, OPEC + forecasted that global average daily oil demand would reach 99.13 million barrels in Q1 2022. This prediction had been revised upwards by 1.11 million barrels from November.
This report shows that Omicron will only have a mild impact in the short term, which supports oil prices. January 2022 is predicted to be characterized by high crude oil prices amid oscillations. As a result of the heavy consumption of crude oil, major oil-consuming nations are increasingly tapping their reserves, which in turn will increase supply and put pressure on oil prices. On the other hand, the impact imposed by the A stable recovery of oil demand and a limited outbreak of the Micron virus should support oil prices.
However, with the significant declines of crude oil prices in December 2021, the current oil prices tend to reach a level of equilibrium and are expected to maintain a trend of consolidation at highs amid oscillations.
US Dollar: Although technical resistance exists in the short term, the USD remains unchanged relative to its mid-line pattern
Since the middle of 2021, the USD has gained strength. On the horizon for 2022, this year’s research will be focused on whether the trend at the end of 2021 will be reversed or repositioned due to the increase in market liquidity at the outset of the year. The market trend is often subject to transition or modification from time to time after the market expectations have been fully accounted for. In the present situation, the U.S. Dollar Index is technically showing a certain resistance level close to 97. It should be noted that the FOMC determined to accelerate tapering at its December meeting and will not raise interest rates until tapering has been completed.
The FOMC dot plot revisions also point towards three rate increases in 2022, whereas the date initially planned for the completion of the tapering in mid-2022 is likely to become the start of interest rate hikes. Early and accelerated rate hikes are expected to remain supportive of the two-year treasury yield, even though accelerating the pace of interest rate hikes will contribute to controlling inflation and inhibiting long-term U.S. treasury yield increases.
Because the USD has always been closely linked to the yield on two-year treasuries, it is likely to maintain its advantage over other currencies. The market is also expecting that the strengthening of the dollar will last until the formal rate hikes and when the market has fully priced in the expectations.
EUR/USD: EUR suffers from a delay in tightening of ECB policy
Throughout the year, EUR’s performance has been below par. As the ECB maintained a dovish policy stance, this, coupled with the Fed’s hawkish policy shift, caused EUR to gradually decline throughout the year, reaching as low as 1.1186. In the year 2022, like USD, it remains unclear whether EUR will experience technical adjustment to the exchange rate due to the transition or changes in liquidity and expectations.
Furthermore, as the Fed has announced plans to intensify its tapering scheme, the ECB, at its final policy meeting at the end of 2021, has also announced that it will increase the volume of its original Asset Purchase Program following the end of the Pandemic Emergency Purchase Program (PEPP), to inject liquidity to the market to an extent. Market concerns have been eased by this news release, which has proven to be positive for the rebound of the euro. The market expects central banks to tighten monetary policy and increase interest rates shortly, and investors should pay attention to the rising global inflation rate.
Moreover, the European Central Bank expects inflation to reach 3.2% in 2022 before declining to 1.8% in 2023 and 2024. It is worth noting, however, that although data inform ECB’s assessment, it also suggests that it is unlikely that rates will be raised in Europe in 2022. Euro’s position as a funding currency remains unchanged, and the probability of the EUR declining after the rebound is anticipated to be higher.
GBP/USD: The GBP is supported by the BoE’s unexpected interest rate hike, but its economic impact upon the Omicron variant needs attention.
The Monetary Policy Committee (MPC) of the Bank of England raised interest rates by 15 basis points in December 2021, exceeding market expectations. According to the BoE’s latest monetary policy statement, it appears that the rate hike is centered on the concern of inflation surging at a rapid pace.
Approximately 5% is expected to be the inflation rate throughout the winter and will comfortably exceed 5% in April 2022. Enhanced inflation is mainly due to the lag in wholesale gas prices in the United Kingdom on utility bills. Regarding the U.K.’s economic outlook, the BoE’s policy statement has been neutral, focusing on the recent employment recovery towards a rosy outlook while explaining the impact of the Omicron variant on economic activity in the near term. Future challenges are on the horizon for the British economy.
The uneven nature of recovery is displayed because consumption, investment, and exports remain well below pre-pandemic levels. The GBP is expected to benefit from a faster tightening of monetary policy in the short term than the market anticipated. In the medium term, investors will pay attention to the impact of the Omicron variant on the economy.
AUD/USD: following stabilization, the AUD tends to rebound
The current exchange rate reflects the stabilization of the AUD before a rebound. Economic data showed that Australia was performing well despite imposing regional lockdown measures in October, which eased market concerns about the country’s fundamentals. The statement made by the RBA Governor on “no interest rate hike in 2022” has, however, been interpreted as reflecting a dovish monetary policy stance to a certain extent, thereby leaving the AUD without constant support.
From a technical perspective, AUD/USD has shifted from unilateral strength at the beginning of 2021 to relative equilibrium. A rebound has been experienced at the support zone near the level of 0.70 since the FOMC meeting, while the growth momentum is still being accumulated in the short term. We believe that AUD tends to rebound following stabilization if the RBA maintains a neutral monetary policy. Stay alert and watch the news closely
This article is prepared by Lucia Han from Mitrade and is for reference only. We do not represent that the material provided here is accurate, current or complete. The article content neither takes into account your personal investment objects nor your financial situation, and therefore it should not be relied upon as such. You should seek for your own advice.