Yesterday UK inflation soared to the highest level in a decade, breaching 5% months earlier than expected. The headline figure masks much steeper rises for everyday items such as fruit and vegetables which is putting a squeeze on household purses and at the same time stripping consumer confidence.

Consumer confidence has also been weakened as the coronavirus Omicron variant spreads through the population with unprecedented pace. This is going to make today’s Bank of England decision all the more difficult as it weighs up whether to raise interest rates in the week before Christmas. After the inflation figure Sterling found support against the USD & EURO but any gains could be quickly eroded should the BOE decide to sit on their hands again until the 1st quarter of next year.

In the final meeting of 2021, the Federal Open Market Committee has announced that it will ramp up the speed at which it pares its bond purchases, putting the nation’s central bank on course to eliminate the emergency quantitative easing program a few months earlier than expected and the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities which is twice the amount announced last month.

Markets on Wednesday were assigning more than a 60% probability of a 15 bps interest rate increase, up from 50% on Tuesday, the emergence of the Omicron variant of the coronavirus may force policymakers to hold off from tightening policy. The market could be quite volatile as we have other key events that could have an impact. In the morning we have German PMI and service data as well as UK flash manufacturing. The ECB own press conference will also be closely followed after the main event of the BOE rate decision at midday and there is a string of US data to finish the day.

Key announcements

German flash PMI-8:30 expected – 51.1.
German flash service -8:30 expected – 51.
Uk flash manufacturing PMI-9:30 expected – 57.6.
Uk flash services PMI-9:30 expected – 57.
MPC rate decision & policy statement -12pm expected – 0.1%.
ECB Press conference-1:30pm
US philly fed manufacturing-1:30pm expected – 30.
US unemployment claims-1:30pm expected – 1.93 million.
US Industrial production 2:15pm expected – 0.7%.
US service PMI 2:45pm expected – 58.7.