LONDON: Sterling strengthened against the euro on Tuesday but stayed within recent ranges as uncertainty around the Omicron variant of COVID-19 limited the market impact of strong UK jobs data.
Since the first Omicron cases were detected on Nov. 27 in Britain, the UK has imposed tougher restrictions. But Prime Minister Boris Johnson faces a large rebellion among his Conservative lawmakers in a parliamentary vote over the measures later on Tuesday.
On Sunday, Johnson said that Britain faces a "tidal wave" of the variant and on Tuesday he warned ministers that there will be a "huge spike" in cases.
The pound fell on Monday due to Omicron fears but on Tuesday recovered to 85.18 pence per euro at 1653 GMT.
Versus the dollar, it was up 0.1% at $1.3228, pushed higher by a slip in the dollar. However, the dollar was still near one-week highs, supported by its role as a safe-haven currency, as well as expectations that the U.S. Federal Reserve would be hawkish at its meeting this week.
The spread of the Omicron strain has raised fears of an economic slowdown, prompting investors to bet against the Bank of England raising rates at its meeting on Thursday.
Sterling edges down to near 2021 low versus dollar
"Nobody expects anything from the MPC (Monetary Policy Committee) on Thursday," said Kit Juckes, head of FX strategy at Societe Generale, who said he expected sterling to stay steady for the rest of the session.
"The fact of Omicron just means that if it wasn't a bad idea to do something about monetary policy in December already, it's a completely daft idea now."
"Omicron adds both a significant layer of uncertainty and a layer of downside risk for the economy, clearly."
The pound barely reacted to strong UK jobs data earlier in the session, which showed that British employers hired a record number of staff in November, suggesting that the labour market withstood the end of the government's furlough scheme.
The BoE is under pressure to address fast-rising inflation. The International Monetary Fund warned the central bank to avoid an "inaction bias" in its approach to combating price pressures. UK inflation data is due on Wednesday.
"I think BoE should be hiking because economic data calls for them to respond," said Charles Diebel, head of fixed income at Mediolanum International Funds.
"The reality is that the government's reaction function to COVID won't be the same as it was during previous surges so the BoE should focus more on economic data.
"If you don't get a lockdown you won't get the same pressure on the economy but you will still get pressure on inflation."
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