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Tom Holian
December 9, 2021

Pound Under Pressure as Omicron variant Sparks a Sell Off

Could The New COVID-19 Variant Change UK Rate Expectations?

The pound has seen a rather difficult period over the last couple of weeks against both the Euro and US Dollar as the news surrounding Omicron continues to weigh heavily on the currency markets.

The Pound Euro rate fell to its lowest level since the first week of November yesterday and Sterling fell across the board during yesterday’s trading session. According to latest reports there are currently 246 confirmed cases having been found in the UK and some early estimates are that it could be as much as twice or even four times more transmissible than the Delta variant.

The seven-day average for positive Covid-19 cases in the UK was up 5.4% from the previous week but interestingly, hospital cases were down 13.2% in the week up to 30 November.

When we look across the Channel we have seen a number of restrictions occur in Europe. Therefore, it could be suggested that the bad news from the variant has already impacted the single currency and we are yet to see its impact on the UK economy and therefore Sterling exchange rates.

The UK has one of the highest uptakes globally when it comes to vaccination and so far, scientists have given mixed messages as to the efficacy of the current vaccines and their impact on Omicron. However, many have also suggested that it is too early to tell what impact Omicron may have.

Looking ahead to next week and the Bank of England are due to meet on Thursday to announce the latest monetary policy decision. Inflation continues to run high and typically a central bank will increase rates to combat the rise. However, as it’s only a few days before Christmas combined with the impact of the new variant it appears unlikely that the central bank may not hike interest rates just yet.

Euro Fights Back Against the Pound

The Euro hit its best level to buy Sterling since early November yesterday afternoon as it is expected that the UK government will consider imposing further restrictions in the near future in an attempt to curb rising infection levels.

The general outlook for the UK looks a little more uncertain and that is one of the primary reasons for the strength of the Euro vs the Pound in recent days.

It is also expected that the Bank of England may not look to raise rates next week and this has caused the Euro to gain vs the Pound. Indeed, the European Central Bank appears to be much more concerned about the impact of the new variant.

The ECB has previously provided an enormous amount of money towards the Covid-19 recovery fund so could we see further funds set aside to reduce the impact of the new variant on the European economy?

As we head towards the end of this week the Eurozone’s leading economy Germany will announce its latest set of economic data in the form of its latest Consumer Price Index.

The CPI is a measure of inflation and with inflation rising to relatively high levels in the last 18 months the expectation is for 5.2% year on year for the latest November figures.

As Germany is seen as the economic powerhouse in the Eurozone, any news can often impact the wider economy, so we could expect to see some movement for Euro exchange rates as we start Friday morning.

In an attempt to control the virus some governments across Europe have brought in new measures to ensure their population are vaccinated which has not gone down well in some areas. Therefore, could we see some civil unrest on the continent if these proposed measures are carried out and if so, what impact could this have on the value of the Euro?

US Dollar Hits Best Level in 12 months

The US Dollar is now at its best level to buy Pounds since this time last year with GBPUSD rates hitting lows of 1.32 at the time of writing. The US Dollar is also trading at close to 18 month highs against the Euro as the US economy and the US Dollar appear to be the flavour of the month.

Although the growth forecast for US GDP has been downgraded to 3.8% by Goldman Sachs the economy still appears to be in a better position than that of both the UK and the Eurozone. The Dollar is also the primary benefactor when the global economy is facing a period of uncertainty. The US Dollar is often used for its safe haven status which appears to be what is happening now with the Greenback as investors move money into the Dollar.

The US Federal Reserve are also expected to raise interest rates twice during the course of 2022 so with a relatively strong economy combined with future interest rate hikes it should come as little surprise as to why we are seeing the Dollar at its recent highs vs both the Pound and the Euro.

We have US Jobless Claims due to be published later this afternoon with the expectation for 222,000. Following this tomorrow, we end the week with the latest inflation data from the world’s leading economy.

As we have seen in both Europe and the UK inflation is spiralling out of control and if inflation continues to remain high in the US it will add further fuel to the fire and the weight of expectation that the US Federal Reserve will be given further support in favour of increasing interest rates. Therefore, could we see even further strength for the US Dollar as we end this week?

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