Jamie Jemmeson
December 6, 2021

Developments in the Omicron Strain Decreases Sterling Rate

Sterling sinks beyond 1985 lows

The emergence of the uncertainty regarding the Omicron variant has increased the woes surrounding the Sterling, sending it to its lowest levels against the US Dollar since last year. Sentiments surrounding the interest rate meeting deteriorated as a result. Compounding this view are comments from Bank of England (BoE) member Saunders who previously voted for a hike. Saunders stated that there could be particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy. In the meantime, the BoE’s Monetary Policy Committee (MPC) member Mann spoke to the markets keen to understand her assessment of the economy and more importantly the interest rate decision later this month. She stated that Omicron will trigger question marks over consumer confidence and could undermine demand for services. She also noted that inflation pressures could intensify, especially if there are renewed supply-chain issues. Mann went on to state that it is premature to talk about rate hikes let alone the magnitude of any rate increase highlighting that she did not suggest support for a near-term move to raise rates.

Looking to the week ahead, the markets will continue to articulate the central bankers’ comments and monitor the development of Omicron. Today, BoE’s MPC member Broadbent will give a speech on the outlook for growth and monetary policy. It is likely to be the final speech before the BoE policy announcement next week. Unlike Saunders, Broadbent is one of the majorities that voted for a no rate rise last month. On Friday, the official Growth Domestic Product (GDP) figures for October are set for release. The evidence that is based on economic activity gauges has been positive and suggests that Q4 started well. A solid monthly rise is also expected. However, the biggest driver of price activity is likely to be the developments regarding Omicron.

The Greenback Strengthen on Risk Aversion and Tapering Comments

The US Dollar strengthened last week before losing some of the gains to the single currency. The start of the week saw the US Dollar strengthen as several Federal Reserve (Fed) officials indicated the pace of the Fed’s stimulus tapering programme may need to accelerate in response to elevated inflation rates and increased momentum in the economy. However, US Fed’s Chair Powell said that the rising COVID-19 cases and the emergence of the new variant pose downside risks to employment and economic activity, and increased uncertainty for inflation. US non-farm payrolls increased to 210k for November after a revised 546k increase the previous month and well below consensus forecasts of around 550k. The unemployment rate declined sharply to 4.2% from 4.6% and below market expectations of 4.5%. Although the increase in payrolls is below expectations, the report indicates a strong labour market and reversed initial losses for the US Dollar.

The risk associated with Omicron will be a key driver this week due to its ongoing impact. The key focus will be on November’s CPI Inflation rate release on Friday as the headline figure is expected to post its highest reading since 1982 close to 7%. The University of Michigan’s Consumer Sentiment Survey for December (on the same day) will also be watched for signs of any impact to its confidence due to Omicron. There are no Fed speakers this week ahead of the Federal Open Market Committee (FOMC) meeting next week.

The Single Currency Benefits from Lowered Rate Expectations

Last week we saw pressure mounting on the European Central Bank (ECB) following the release of Eurozone’s headline CPI inflation figures which increased to 4.9% in November, considerably higher than the 4.5% forecast and 4.1% reading previously. ECB Chief, Christine Lagarde, insisted that the surge in inflation is a one-off but stripping back the volatile energy prices inflation remains above the Central Bank’s target of 2.6%. Currently, the ECB is expected to announce the end of its €1.85tn pandemic bond-buying programme in March 2022. Considering recent inflation surges, there are calls to end this sooner than expected, however.

The single currency was able to make gains against the Sterling as interest rate expectations for the UK diminished with the ongoing uncertainty of Omicron. Coupled with the move against the US Dollar following the weak employment report on Friday, has put some questions into play regarding the pace of tapering following the comments earlier this week.

The German ZEW survey is set for release on Tuesday and will attract some attention and likely show falls in both the current situation and expectations.

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