The Pound traded in a narrow range on Christmas Eve in thin market trade as a new UK government study suggested that Omicron is less severe than previous variants.
However, new record-high daily coronavirus cases and rising hospitalizations offset the study’s findings.
With no UK economic data out in the coming days, Covid news will likely be the main driver of GBP exchange rates as the UK government continues to hold off tightening restrictions.
Euro Muted amid New Covid Restrictions
The Euro struggled through Friday’s session as recent tighter restrictions in many European countries continued to act as a headwind for the single currency.
In addition, a risk-on market mood following the UK’s positive Omicron research dampened the appeal of the safe-haven Euro.
Looking ahead, a new Covid measure being introduced in several Eurozone nations could weigh on EUR sentiment.
The Pound has now reversed most of the losses sustained after November’s emergence of the Omicron variant led markets to doubt earlier assumptions about interest rates at the Bank of England (BoE) next year.
Investors revived their expectations of a steep 2022 increase in Bank Rate last week after further studies suggested the Omicron strain could pose a lesser threat to public health than its predecessors, helping to extend the Pound-Euro rate’s December recovery along the way.
“As we had expected, the move in yields is pulling the EURGBP toward the 0.84 level [GBP/EUR toward 1.1904],” says Juan Manuel Herrera, a strategist at Scotiabank, in a note last week. “Look for the GBP to remain well supported on short-term dips against the EUR as well.”
Sterling’s rebound dates back to mid-month when official data showed inflation topping 5% for November and employment going unaffected by September’s end of the HM Treasury furlough scheme, ultimately triggering December’s BoE decision to lift Bank Rate to 0.25%.
Financial markets have since wagered that the BoE could be likely to lift Bank Rate to a post-financial crisis high of 1.25% next year, while in the process helping Sterling to paint what has become a bullish picture on the charts since its rise above 1.1781.
Once into the new year, much will also depend for Sterling on the scale of the burden imposed on the economy by the Omicron strain of the coronavirus, and any knock-on impact on the market’s outlook for interest rates at the BoE, which are widely expected to rise to 0.50% in February.
“The near-term outlook for the UK economy remains in limbo as we wait to see the extent to which the Omicron variant increases the pressure on health services. The level of infections and the severity of illness will be key,” says Andrew Goodwin, chief UK economist at Oxford Economics.
“High-frequency data continues to show much lower levels of activity in social consumption sectors. Restaurant bookings in London have been particularly badly hit. While that partly reflects the reimposition of guidance to work from home, it is also likely to be a function of higher case numbers in the capital and the impact that has had on confidence and mobility,” Goodwin wrote in a Thursday research note.
EUR/GBP Short (Sell)
Enter At: 0.83904