Pound US Dollar (GBP/USD) Exchange Rate Dips as Omicron Concerns Ease
After making some gains early in the day, the Pound US Dollar (GBP/USD) exchange rate slipped on Tuesday amid an improving market mood as fears over the Omicron coronavirus variant ease.
With improved US trade figures the only notable data released today, risk appetite, the UK Covid-19 situation, and Bank of England (BoE) rate hike expectations are driving movement in GBP/USD to trade at $1.3217 at the time of writing.
Pound (GBP) Struggles on UK Covid-19 Situation
The Pound (GBP) is struggling today amid a more upbeat market mood on reports the Omicron variant of coronavirus is less deadly and patients experience milder symptoms than other variants.
Despite making some gains in risk-on trade yesterday, the Pound has come under pressure today following comments from a Downing Street spokesman.
While it seems the Omicron variant may be more manageable than first feared, comments from Prime Minister Boris Johnson during a cabinet meeting have weighed on the Pound. A Downing Street spokesman said:
“The prime minister said it was too early to draw conclusions on the characteristics of Omicron but early indications were that it is more transmissible than Delta.”
With rising infections through a more transmissible coronavirus, the chances of tighter restrictions would likely increase.
However, the spokesman added there was no discussion on the UK government’s ‘Plan B’ to tighten restrictions.
Uncertainty surrounding the likelihood for a rate hike from the BoE also continue to limit Sterling.
After cautious comments from several policymakers last week, Deputy Governor Ben Broadbent yesterday said that inflation will ‘comfortably’ rise higher than 5% by spring and warned that the tight UK labour market will add persistent inflationary pressure.
He added transitory inflation should be understood as the next 18-24 months, and will make his decision on a rate hike at the next policy meeting on 16th December.
With the uncertainty of the Omicron variant, markets reduced bets further for a December rate hike, in turn weighing on the Pound.
US Dollar (USD) Firms in Line with Treasury Yields
The US Dollar (USD) firmed against many of its peers during Tuesday’s European session as a risk-on market mood pushed US Treasury yields higher, which in turn supported USD gains.
Easing concerns over the highly-mutated Omicron variant fuelled optimism that the new coronavirus’ impact will be weaker than first thought on global economic activity.
The latest US trade data also supported the ‘Greenback’ as the country’s trade deficit narrowed significantly to $-67.1 billion in October, down from a record high $-66.8 billion in September.
The figures showed the lowest trade deficit in 6 months, with exports surging 8.1% to a record high $223.6 billion, and imports hit new highs of $290.7 billion.
Meanwhile, despite news the Omicron variant is present in nearly a third of US states, the top US infectious disease official, Anthony Fauci, said:
“Thus far it does not look like there’s a great degree of severity to it.”
Pound US Dollar Forecast: Fed and BoE Policy Gap to Drive GBP/USD Losses?
The Pound US Dollar exchange rate may come under further pressure through this week as bets for tighter monetary policy from the Federal Reserve build momentum, especially with the added optimism the Omicron variant’s impact could be less than first feared.
With the BoE appearing less likely to raise interest rates in December, the difference in policy stance between the UK and US central banks may drive losses in GBP/USD.
Meanwhile, US jobs data released in the coming days may provide the US Dollar with additional support. Forecasts point to job openings falling modestly which may suggest some loosening of the tight US job market, while initial jobless claims are expected to fall again.
In the absence of significant UK data releases until GDP growth for October on Friday, the Pound will remain sensitive to Omicron headlines, UK-EU negotiations on the Northern Ireland protocol, and any hints at when the BoE may raise interest rates.