GBP USD’s BoE-fuelled Gains Erased by Omicron

GBP USD’s BoE-fuelled Gains Erased by Omicron

The British pound dropped to a three-day low on Monday, before hovering above 1.32 against the dollar as a risk-off sentiment dominated financial markets and pressure mounted on the UK government to slow the spread of the Omicron coronavirus variant.

Record levels of Covid-19 cases were reported in Britain over the weekend, with officials warning that the full impact of the latest variant is yet to be seen and Prime Minister Boris Johnson holding a meeting of senior ministers to assess the situation.

Support from the Bank of England’s surprise interest rate hike has already waned for the pound, causing it to erase its gains from last week amid the Omicron crisis. The focus has shifted to the prospect of new rules to curb the spread of the virus and government disarray following reports of officials holding gatherings and parties when Britain was under lockdown last year.

The pound was left feeling under the weather as investors fretted about the economic impact if the UK is plunged back into another lockdown.

When asked on Monday if the government would impose further Covid restrictions before Christmas, Deputy Prime Minister Dominic Raab said: “we can’t make hard, fast guarantees.”

“I’m not going to trail things when decisions haven’t been made,” he said when quizzed about the prospect of more restrictions in England in the coming days.

Dollar on the back foot

The dollar began Monday on a firm footing after a Federal Reserve official pointed towards a first pandemic-era US interest rate hike as early as March.

In prepared remarks to the Forecasters Club of New York on Friday, Fed Governor Chris Waller said: “I believe an increase in the target range for the federal funds rate will be warranted” at the Fed’s March meeting.

Earlier on Friday, New York Fed president John Williams told CNBC that the US central bank will gain “optionality” to hike rates in 2022 by ending fiscal stimulus by March

The US currency came under pressure later in the day, however, after US Treasury yields dipped following a blow to Democratic spending plans in Washington and on fears about the ongoing spread of the Omicron variant.

Looking ahead

A quiet start to the week in economic calendars on both sides of the Atlantic means investors must wait until Wednesday for the first releases of note: gross domestic product for the third quarter from both the UK and US economies, followed by US consumer confidence for December.