GBP USD Weighed Down by Omicron-Fuelled Rate Concerns

GBP USD Exchange Rate Continues to Pull Away from March 2020 Low 

The pound was in the process of reversing its losses against the dollar on Tuesday before it fell 0.5% to a fresh 11-month low of 1.3247.

The UK currency was pushed lower by investor fears that the emergence of the Omicron coronavirus variant might force Bank of England (BoE) policymakers to keep interest rates unchanged this month.

Speaking at a press conference at Downing Street, Health Secretary Sajid Javid acknowledged that the new variant is likely to be transmitting in the community.

Prime Minister Boris Johnson underlined the government’s determination to control the spread of the new variant by announcing that all adults will be offered a booster jab by the end of January.

With the 16 December BoE rate decision on the horizon, a deterioration of the virus situation in the UK – and its potential to pour cold water on rate hike expectations – could put further downward pressure on the pound.

By this morning, GBP USD had bounced back above the 1.33 benchmark.

Dollar gains on rising risk of inflation

The dollar was given a boost on Tuesday after Federal Reserve Chair Jerome Powell said inflationary pressures had increased.

“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner,” he said. “I expect that we will discuss that at our upcoming meeting.”

During a hearing with the US Senate Banking Committee, Powell also said higher prices are generally related to the pandemic, but some increases are being experienced more broadly and there is a growing risk of higher inflation – raising expectations that the central bank will hike interest rates next year to control inflation.

“Generally, the higher prices we’re seeing are related to the supply and demand imbalances that can be traced directly back to the pandemic and the reopening of the economy,”

“But it’s also the case that price increases have spread much more broadly … and I think the risk of higher inflation has increased.”

The dollar was leant further support by its safe-haven status amid growing concerns about the spread of the Omicron variant.

Looking ahead

The Markit manufacturing purchasing managers’ index (PMI) is published in the UK this morning. BoE Governor Andrew Bailey is scheduled to make a speech today, which investors will scrutinise for signals about the likelihood of an interest rate rise this month.

A raft of influential data sets are slated for release from the US economy today: ADP employment change, Markit manufacturing PMI, ISM manufacturing employment index, ISM manufacturing new orders index, ISM manufacturing PMI.

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