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Oliver Godwin
December 3, 2021

Omicron Variant Could Impact Planned Rate Hikes in 2022

Omicron Variant Could Impact Planned Rate Hikes in 2022

GBP

In recent weeks, the Pound’s strength has been linked with the likelihood of interest rate hikes in the UK and when they will occur. Money market pricing suggests there is now 33% chance of a rate hike in December, down from 100% last week. The markets are not expecting a rate hike from the Bank of England this month, however if this does occur you could expect to see the Pound rally against most currencies. Catherine Mann of the Bank of England Monetary Policy Committee, stated “it’s too early to talk about the timing of a rate rise, much less by how much

The reason for the recent fade in Pound strength against the US dollar and Euro can be attributed to the lower expectations for a December hike amid concerns the new Coronavirus variant “Omicron” which is spreading across the UK. Oxford University, who invented the vaccine distributed by AstraZeneca stated, “Despite the appearance of new variants over the past year, vaccines have continued to provide very high levels of protection against severe disease and there is no evidence so far that Omicron is any different”.

The market is instead expecting a rate hike in February next year, currently predicted at 90%, this may well change if the Omicron virus turns out to be worse than expected. The Bank of England will be keeping a close eye on inflation levels and consumer confidence in the UK. Even though hospitalisations and deaths are falling in the UK, there is clearly worry of a new wave hitting us and the economy. This is reflected in the lower mobility, restaurant bookings and internet search activity related to social activities. All of this points towards a dip in economic activity which the Bank of England will consider when deciding on future interest rate rises.

“For central banks, the spike in uncertainty and the downside risks to near-term economic performance are a clear reason to hold back,” says Holger Schmieding, Chief economist at Berenberg Bank. “At the BoE, swing voters may possibly see Omicron as a reason to potentially delay rate lift-off from December to February 2022.”

Keep in touch with your account manager at Lumon to stay up-to-date with rate hike predications and what this could mean for your currency exchange.

EUR

Onicron has started to cause political frictions across Europe. Germany has tightened restrictions for those unvaccinated against Covid-19. Outgoing Chancellor Angela Merkel announced, “People without the jab won’t be able to access non-essential shops, restaurants, places of culture or leisure”.

The chief of the European Union’s executive arm announced last week that EU nations should have an open debate regarding Covid-19 vaccinations becoming mandatory. This debate has been urged because too many people still refuse to get vaccinations voluntarily, with EU-wide rates standing at 66% with approximately 150 million not vaccinated.

So far, EU nations have taken different approaches to this issue. Austria pledged to mandate vaccines for all residents beginning February. Greece plans to fine people aged 60 and up 100 euros per month, if they don’t get vaccinated. Greek Prime Minister Kyriakos Mitsotakis told parliament. “The data is irrefutable: 9 out of 10 Greeks who lose their lives (to COVID-19) are over the age of 60 and more than 8 out of 10 of the people (who die) are unvaccinated”. Slovakia, is considering paying people 500 euros to get vaccinated.

The EU’s 27 health ministers are scheduled to assess the emergence of the omicron variant of the coronavirus next Tuesday the 7th December. Any recommendations they come up with would be put to the leaders of member nations during a regularly scheduled summit on the 16th December.

Depending on the approach the governments take, you could expect to see some backlash from the public who simply do not want to be vaccinated. Political uncertainty can affect the currency markets, so it is worth keeping up-to-date on progressive talks.

USD

The Dollar has seen declines in value recently as investors feel the Federal Reserve would shy away from tightening monetary policy in 2022, in the face of the new Omicron covid variant. Investors seem to be fretting about the fast-spreading Omicron variant with the US reporting its first case. Will this have a knock-on effect to the Federal Reserve’s tapering plans?

Jerome Powell the Fed Chair told lawmakers that Covid-19 outbreaks are inflationary and that it is time to retire the word transitory and that the Fed can consider ending QE bond buying a few months earlier. Mikael, Chief Analyst at Danske Bank said “We now expect the Fed to increase the tapering pace from $15BN per month to $25BN so that the tapering is concluded in April”. Danske Bank also expects three 25bp rate hikes in 2022 during June, September and December months. If this prediction comes to fruition, we can expect the US dollar to have a strong 2022.

Today, we will receive the latest figures for non-farm payroll which always has the ability to move the currency markets, especially as the results will be a factor in the Fed’s tapering decision later this month. Nonfarm payrolls are an employment report released monthly, usually on the first Friday of every month, and heavily impacts the US dollar, the bond market and the stock market.

To keep on top of the US tapering programme and how that could affect your currency transfer, speak with your account manager here at Lumon.

This blog post is intended to provide you with information on the services Lumon Pay Ltd (“LPL”) offer and should not be interpreted as advice or as a solicitation to offer to buy or sell any currency or as a recommendation to trade. Foreign exchange rates provided therein are for indicative purposes only and are not intended to give an accurate reflection of current currency exchange rates or to predict future movements in currency exchange rates. LPL, trading as Lumon, is a company registered in England with its registered address at Building 1, Chalfont Park, Gerrards Cross, Buckinghamshire SL9 0BG. LPL is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022).