LONDON: Sterling dived back towards a 11-month low on Monday as investors weighed the discovery of the Omicron coronavirus variant on the outlook for the British economy.
While British health authorities have yet to annouce any major increase in COVID restrictions, traders have quietly whittled away at the odds of the Bank of England raising interest rates later this month.
“The main risk for the pound aside from the virus backdrop remains the ever-shifting Bank of England outlook with comments from policymakers confusing markets,” Nova Scotia analysts said.
The pound slipped 0.2% to $1.3309 in quiet London trading, not far from a December 2020 low of $1.3278 on Friday. Against the euro, it strengthened 0.2% to 84.67 pence.
The Omicron variant was first recorded in South Africa last week, prompting countries to rush to tighten border controls and sending markets into a tailspin on Friday. A semblance of calm returned on world markets on Monday as investors waited for more details to assess the severity of the Omicron variant. Still, broader sentiment was a bit more cautious towards the pound.
“In terms of the outlook, for the UK it’s possibly a bigger risk as the market’s long-held assumption that the UK is unlikely to witness another lockdown,” Jordan Rochester, a
strategist at Nomura, said.
Investors worry that more lockdowns would water down expectations of rate hikes, a key factor that has held up the pound in recent weeks.
Markets are pricing in around 8 bps of an increase in interest rates by the Bank of England on Dec. 16. That has fallen from more than 12 bps at the start of last week.
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