Pound Dips on BoE Expectations, Euro Rebounds as Omicron Rocks Markets

GBP/EUR Exchange Rate: Pound Slides as BoE Rate Hike Bets Weaken

The Pound Euro exchange rate has tumbled over the last week due to the potential threat of the Omicron coronavirus variant to UK economic activity going into winter.

The emergence of the variant and fears of tighter UK restrictions led to weakening expectations for a December rate hike from the Bank of England (BoE), despite recent comments from chief economist Huw Pill hinting at raising rates.

BoE policymakers may view the Omicron variant and high Covid-19 cases as reason to delay its decision to hike rates until more evidence about the latest variant’s impact becomes available.

Looking ahead, Sterling will remain sensitive to Covid-19 concerns and BoE rate hike expectations as the December policy meeting draws nearer, with investors looking for insight from the central bank’s monetary policy committee members on the impact of the Omicron variant.

GBP/USD Exchange Rate: Pound Dented by Post-Brexit Tensions

The Pound US Dollar exchange rate has fluctuated through the last week’s trading as UK-EU talks on post-Brexit trade drove volatility in GBP/USD.

Negotiations over the Northern Ireland protocol appear to remain at an impasse, with Irish Taoiseach Micheál Martin the latest to say talks will likely run into next year.

Rising tensions between the UK and France over fishing licences row and diplomacy disputes have also weighed on the GBP/USD exchange rate.

In the absence of notable UK data releases in the coming week, headlines over the UK’s talks with its European neighbours will likely continue driving GBP movement.

USD/GBP Exchange Rate: Shifting Fed Rate Hike Bets Stoke US Dollar Volatility

The US Dollar has traded in a wide range on shifting expectations for a rate hike from the Federal Reserve.

Data indicating soaring inflation and a strong jobs market ahead of Thanksgiving, as well as the Fed’s minutes from its latest policy meeting, all strongly pointed to the Federal Reserve accelerating its bond-buying programme to prepare to raise interest rates in 2022.

However, the US Dollar slumped in line with US Treasury yields as fears the Omicron variant will disrupt global growth weakened expectations for the Federal Reserve to hike rates.

After Fed chair Jerome Powell again hinted at tightening monetary policy in a speech to the US Senate by saying it is time to stop describing inflation as ‘transitory’, the US Dollar jumped on increased rate hike bets.

The US Dollar may make gains again this week as strong US data may again support the case for tighter monetary policy. ISM manufacturing and services PMIs look set for robust readings in November, and another bumper non farm payrolls is expected.

EUR/USD Exchange Rate: Euro Rebounds as ECB Policy Gap Narrows

The Euro jumped from 16-month lows against the US Dollar last week following the emergence of the Omicron coronavirus variant.

News of the new variant appeared to weaken the likelihood of other major central banks, such as the Federal Reserve and BoE tightening monetary policy sooner, narrowing the perceived policy gap with the European Central Bank’s (ECB) accommodative stance.

However, surging cases of Covid-19, and falling Eurozone economic sentiment and business morale in Germany, while inflation soared to a record 4.9% in the bloc.

Looking ahead, Omicron developments will drive EUR/USD movement as well as forecasted drop in Eurozone unemployment to 7.3% and Germany’s ZEW economic sentiment index published next week.

Andrew Roberts

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