GBP USD Tests 2021 Lows as Rate Hike Doubts Mount

GBP USD Exchange Rate: The Week Ahead December 20th

The pound slipped towards 2021 lows against the dollar on Tuesday amid growing expectations that the Bank of England (BoE) will keep interest rates unchanged next week.

Investors expect the central bank’s policy-setters to delay tightening monetary policy following the emergence of the Omicron coronavirus variant, which has introduced fresh uncertainty into the equation.

On Monday, the UK government’s Secretary of State for Health and Social Care, Sajid Javid said there is now community transmission of the Omicron variant across England but it’s still too early to say if this will “knock us off our road to recovery”.

Concerns surrounding the spread of the Omicron variant overshadowed the latest KPMG/British Retail Consortium retail sales report, which showed UK sales rose in November compared with the year before.

By this morning, GBP USD had regained its footing a moved up to the 1.32 mid-range.

Dollar firms on hopes Omicron is mild

The GBP USD rate was dealt a further blow on Tuesday by a firm dollar as investors focused on reports suggesting the Omicron variant may be mild.

Early signals from South Africa indicate that those infected suffer relatively minor symptoms compared with previous Covid variants. This view was supported by Anthony Fauci, the top US infectious disease official, who also said it doesn’t appear too severe.

US unit labour costs were revised sharply higher in the third quarter, suggesting inflation could persist for a prolonged period – conditions that will raise expectations that the Federal Reserve will raise interest rates, starting next year.

Labour Department data released on Tuesday revealed unit labour costs – which shows the total cost of employing a labour force – accelerated at a 9.6% annualised rate in the third quarter, revised up from the 8.3% pace reported last month.

A separate report from the Commerce Department on Tuesday showed the US trade deficit narrowed in October as exports jumped to a record high, providing potential for trade to contribute to economic growth in the fourth quarter for the first time in over a year.

The Commerce Department said that the trade gap plummeted 17.6% to $67.1 billion – the largest percentage decline since April 2015. Economists had forecast a $66.8 billion deficit.

Looking ahead

The next release of note from the US economy hits the headlines tomorrow when initial jobless claims for the week ended 3 December is published by the US Department of Labour.

Friday’s US consumer price index report is in focus for investors in the dollar who are eager for clues about the timing of Fed rate rises, with the Federal Open Market Committee’s (FOMC) December meeting scheduled for next week.

Investors in the pound must wait until Friday for a triumvirate of influential economic indicators: gross domestic product, industrial production, and manufacturing production.

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