Pound Remains Rangebound Despite Interest Rate Hike and Omicron Cases

Despite increased volatility for sterling last week, markets have generally not seen any significant direction for currency pairs such as GBP/EUR or GBP/USD. Despite the 1.1830 that the pound to euro exchange rates moved to off the Bank of England interest rate hike last Thursday, FX rates have remained very rangebound mainly sitting inside of 1.17 with markets getting used to seeing day ranges on the pairing of just 0.5 cents.  

Some of this lack of movement can be attributed to battle between the positive sentiment towards UK economic recovery and the uncertainty that the ongoing Omicron developments create. The downsides for sterling could take control though with the UK’s last GDP Q2 reading of a very sluggish 0.1%. However, this is to be replaced by an anticipated 1.3% this Wednesday according to FX Street, which could provide a beneficiary lift for the pound. Unfortunately, few can ignore the discussions from government over a potential 2 weeks lockdown after Christmas. With industries such as hospitality and travel so devasted by the events of last year, an economy still finding its feet will be fragile and sensitive in response to further actions which could damage their businesses. Recent restrictions too will further impede the travel industry as rules of travelling internationally to countries such as France are being tightened in an attempt for limit the spread of the new variant.

Speaking of, last week the UK had seen daily COVID cases surpass 90,000 – the highest figure since the pandemic began. Before this you would have to go all the way back to last January where we had seen as many daily figures. Whilst this new strain is more infectious than others such as the delta variant, the pound seems to have retained most of its strength as a result of the solid vaccine rollout. There is good progress too with the booster jab which is soon to become available to people of all ages, far ahead again of most nations globally. This provides some needed reassurance to sterling against its major currency counterparts and could well be a factor that has prevented riskier currencies such as the pound being sold off for the safe-havens of the US dollar and Swiss franc. 

On a separate note, with last Thursday seeing the Bank of England hiking rates from 0.1% to 0.25% in a shock decision from the committee, this monetary policy change should help tackle rising inflation in the medium to long term. This is something that should be watched carefully moving forwards as there will be heavy scrutiny over whether this was the right decision considering the rising COVID cases and could likely have market movement entail consequently.

New Brexit negotiators – how will this affect the euro?

Lord David Frost, the UK’s chief Brexit negotiator resigned last week in response to “concerns about the current direction of travel” regarding COVID-19. The position of heading further negotiations with the EU over the Northern Ireland Protocol and fishing rights will now be taken by Foreign Secretary Liz Truss. Whilst Brexit is still a very hot topic, many believe that it gives the UK-EU relationship a “reset button” to further discussing policies which make trade between the two regions convenient for both parties. At times, ‘loggerheads’ and ‘gridlock’ could be two words among many similar others which described the progress on a Brexit deal. With a new UK top negotiator, it could be interesting to see if faster progress could be made. Should this be the case, we could see both the pound and euro strengthen over greater certainty of trading conditions within Europe.

In news regarding coronavirus, the Netherlands have just gone into a strict new lockdown with many leisure activities banned until mid-January and only 2-4 guests per household in the lead-up to Christmas. This follows large recordings of the Omicron variant and only 7% of citizens having received their vaccine boosters.

Germany and France are in a similar position with over 25,000 new variant cases recorded on Saturday in France alone and has caused the country to ban UK tourists’ entry to the country. Whilst this will damage the economy as a whole, it will especially affect the ski season industry in the Alps with small businesses heavily relying on this seasonal activity for their annual income.

Until the booster vaccination programme can accelerate at a faster pace, the single currency is at risk of weakening against currencies whose nations have got a larger proportion of their country fully vaccinated.

USD continues to make gains against most G10 currencies

Turning back to economic data releases, just like the UK, the US will see its GDP Q3 figures come in on Wednesday. Unlike the UK however, forecasts are for a much more attractive 2.1%. Both countries had predictions for 2022 to see financial recovery of more than 5% and so still have quite a way to go but the States looks to be in a better place at present. The world’s largest economy will have mixed data throughout the rest of the week though with Thursday’s durable goods orders expecting to shift from a previous -0.4% to 1.5% whilst nondefense capital goods orders to drop from 0.7% to 0%.

Ultimately, market data seems of reduced interest to the markets at the moment though as the ever-changing sudden changes emanating from COVID continue to reshape the direction of progress for countries globally. Irrespectively, the dollar is doing very well in comparison to the pound and the euro. With mid-market rates trading in the 1.32’s and 1.12’s respectively at time of writing, they represent the best levels to buy pounds with US dollars since December last year and July last year for buying euros. This equates to gaining roughly 10 cents on both currency pairings since last year.

Besides the fact that the US is doing well with its vaccine programme considering the size of the country, its monetary policy stance is looking optimistic under President Biden too. The US central bank, the Federal Reserve, are potentially considering two interest rate hikes next year as inflation is forecast for 6%, even more than the UK’s predication of an overall 5.5% for spring 2022! It is also looking to reduce the size of its balance sheet and sell off some of its investments it made in securities and bonds as part of its quantitative easing process it did to keep the economy turning over when the early developments of COVID were skyrocketing. This is confidently positive and shows that the US economy is indeed recovering and that it will be self-sufficient without the need for inward cash injection from the treasury.

For now, it seems that the US dollar will continue to be one of the best performing G10 currencies if its progress continues in a similar fashion. For further insight into your latest trading position, please reach out to 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).