Good afternoon,

A mixture of central bank monetary policy, the Omicron variant, and geopolitical woes has seen the volatility for euro and sterling to rise to multi-month highs.

Traders are gearing up for big swings, as meetings by the Federal Reserve, the European Central bank, and the Bank of England come into focus.

On the Fed’s side, market participants are expecting a faster pace of tapering, news which has been broadly supporting USD. The European Central Bank on the other hand, will likely give guidance on their plans for the end of the Pandemic Emergency Purchase Programme. The convergence of these two events have meant that euro-dollar one-week volatility is at its highest level since December 2020.

Expectations of the Bank of England hiking the rates in December have fallen dramatically, as the ‘plan B’ measures will give the dovish voices a reason to delay. As this has now been mostly priced in, the market will start looking at the feasibility of a February rate hike.

All in all, 2022 could be a strong year for the pound-euro rate, as the monetary policy diversion between the ECB and the BoE will crystallize.

Have a great weekend.

Thomas De Caluwé, Relationship Manager.

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