The parade of meetings of the major central bankers this week marked the end of the ultra-low monetary policy. However, even after the U.S. Federal Reserve (Fed) had made a decision to accelerate tapering, few had expected the Bank of England (BoE) to be more insolent. The U.S. watchdog increased tapering from $15 billion to $30 billion amid the sky-high inflation rate of 6.8% that has not been seen since 1982. The interest rate in the United States is expected to be raised in 2022.
The inflation in the United Kingdom hit 5.1% in November, which is a 10-year high and is way below that of the U.S. The Omicron variant has hit the United Kingdom badly. The World Health Organisation (WHO) claimed that the Omicron variant is “the most significant threat” to public health in the U.K. More than 4,500 people in the UK were admitted on a single day on December 16, daily hospitalisations from COVID-19 are now exceeding the peak from last winter, England’s chief medical officer said. In the wake of the new COVID-19 wave, the U.K. economy is slowing down sharply. According to IHS Markit/Cips the PMI that measures economic output fell from 57.6 in November to 53.2 in December. That is quite close to the 50-point mark. A number below 50 suggests the economy is contracting. Even more surprising news came from the BoE’s decision to raise its interest rate to 0.25% from 0.1%, for the first time in three years. But the most intriguing aspect was that the BoE has left its quantitative easing program untouched at $1.16 trillion. Monetary practice suggests a central bank has to firstly ramp up it bond purchase programs and only then go for interest rate hikes.
The BoE explained its actions by pointing to the robust labour market that is in line with its central projection, and a need to return inflation toward its 2% target. The bank fears that without such actions, inflation may spike to 6% by next April, so a preventive strike was needed. During its Thursday meeting, the European Central Bank (ECB) left the interest rate unchanged but indicated a move towards a tighter monetary policy. The ECB announced that it will cut its overall bond buying programs to $40 billion a month starting on April 2022 from the current amount of $80 billion.
A sudden move from the BoE has pushed the Pound against the Dollar to 1.338 from 1.328. The Cable scaled back in the early trading hours on Friday to 1.3320. However, it seems that the Pound may continue on its downside track as it is limited by the resistance at 1.3400-1.3420, a September low that has now turned out to be a resistance. This level also indicates a 38.2% correction level on the Fibonacci retracement at daily timeframe chart.
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