What to watch (1/2)

This morning markets continue to digest yesterday's Fed decision to increase the pace of tapering (in line with expectations) and to change the dot plot with more hikes penciled in for 2022 than expected a a slower hiking path thereafter.

• These moves are reflected in the Eurodollar curve. The Mar-22, Jun-22 and Sep-22 contracts are all lower than their pre-Fed levels and have stayed largely unchanged overnight; the Dec-22 and Mar-23 contracts have drifted back to their pre-Fed levels while the Jun-23 contract onwards has moved higher overnight and now trade above their pre-Fed levels.
• The Bank of England meeting today will be closely watched, particularly after yesterday's inflation prints (3 tenths higher than expected with headline at 5.1%Y/Y, core at 4.0%). Markets are now pricing in around a 45% probability of a hike today, up from around 30% at the end of last week. Only 4/21 analyst previews we read look for hikes, however. On balance the MNI Markets team thinks that the MPC will keep rates on hold for now with the number of Omicron now estimated to be doubling in the UK faster than every 2 days. Macro data looks very strong (labour market, wages, inflation) - although GDP data is a not recovering quite as fast as hoped. The MPC cited the uncertainty of the end of the furlough scheme as a reason to keep rates on hold in November, arguably uncertainty is higher now given that a lockdown cannot be ruled out. An on-hold decision will likely see some moves in short sterling and the pound, but if the door is kept open for a February hike these are unlikely to be lasting. Bigger moves would be seen on a hike however. See the full MNI BOE Preview here.