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Pound Trading Sideways as Markets Await Omicron Data

The pound traded within a tight range against both the euro and US dollar during yesterday’s trading with less than a 0.25 percent move against either currency. The pound is currently sat in limbo as investors await more data on the Covid-19 variant Omicron although there is good reason to suspect the pound’s next move may be up.

The UK is arguably one of the most protected countries with high vaccination numbers and booster jabs now in roll out. Markets are cautiously optimistic that vaccines will protect against Omicron, limiting the number of severe cases and hospitalisations, although there is concern over the higher transmission rate. The Omicron variant has a greater number of mutations than its predecessor, the Delta variant, allowing it to spread more easily.

It is hoped that Pfizer may provide data before the weekend, which will give an insight into how its Covid-19 vaccine is faring against this latest Omicron variant. Investors will be keen to gage the impact on infections and serious illness although ultimately, it’ll be government response that financial markets look to.

More than 20 million people in the UK have now received their booster jab, placing the UK in a good position, although Boris Johnson has been slow to lockdown and impose restrictions before so could take a cautious approach, hindering the pound’s recovery.

There are currently more than 300 cases of the Omicron variant in the UK, but to date not one hospitalisation. Interestingly, Covid-19 now has an estimated fatality rate of 0.085 percent, which is only marginally higher than the estimated fatality rate of the flu, 0.04 percent.

Elsewhere, an interest rate hike in December is looking less likely as the Bank of England’s Monetary Policy Committee member Michael Saunders has pulled back from his previous hawkish tone, saying the Omicron variant will affect his decision, suggesting whilst a hike is necessary, now may not be the right time. However, this has had little impact on the pound as markets had already discounted the interest hike probability two weeks ago with the emergence of Omicron.

Euro Falls Despite Better-Than-Expected Q3 GDP Data

Eurozone GDP recovered to within 0.5 percent of its pre-pandemic level during the third quarter, but the euro lost value as markets focussed on the current quarter where rising Covid-19 infections and hospitalisations are at a worrying level. This adds to continued supply chain pressures, which have failed to show a change in direction anytime soon.

Eurozone governments have already increased restrictions and lockdowns due to the Delta variant and with the block now facing another variant in Omicron, it is difficult to see EU states easing measures. The variant is already adding to the high level of uncertainty globally, but particularly in the eurozone where member states have failed to get the disease under control.

Instead, some EU states now see compulsory vaccination and restricting the unvaccinated as the way forward although the EU has remained tight lipped on this subject, no doubt realising one of its core founding values is people’s freedoms and human rights.

Two thirds of EU citizens are now vaccinated, which should help the EU avoid draconian lockdown measures but nevertheless, there is now real concern over the Eurozone’s economic prospects.

Meanwhile, the IMF has said that Eurozone governments should carry on spending to support the economic recovery and consolidate public finances when it is right to do so. The IMF said policies should be targeted with particular attention to inequality and poverty.

Goldman Sacs Downgrades 2022 US GDP

The US government has approached the Omicron variant in a lighter way by comparison to the UK and EU, but nonetheless Goldman Sacs has slashed its forecast for US economic growth for 2022 to 3.8 percent, citing the uncertainty around the new variant.

The investment bank noted the slow economic reopening although only anticipate a mild slowdown on service spending and cut the forecast 0.4 percent from a previous 4.2 percent estimate. The investment bank feels Omicron will travel faster and wider, but the severity will be limited by the vaccines. Another problem for the economy will be the shortage of workers as people do not feel comfortable to the working environment.

However, the US dollar is still benefitting from its “safe-haven” status and the fact that investors remain convinced of two interest rate hikes next year, the first perhaps coming as early as May. If Omicron data shows the variant is no more dangerous or less dangerous than the Delta variant, this could lead to a depreciation of the dollar as investors return to more riskier assets.

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