Pound hits fresh 2021 lows on new UK COVID restrictions

Sterling briefly fell to its weakest position so far this year versus the US dollar on Wednesday, after Boris Johnson’s government announced that they would be enacting ‘Plan B’ in England to tackle the latest wave of COVID-19 infections.

Mask wearing has been reintroduced in most venues, Covid-19 passes will be required, while the government is set to urge the nation to again work from home if possible from Monday.

The measures themselves are relatively minor, and should have very limited impact on the UK economy - Scotland, Wales and Northern Ireland had already announced similar restrictions. While additional measures appear unlikely, much will depend on the severity of the omicron variant, which is currently spreading at a rather alarming rate. According to vaccine producer Pfizer, three doses of their jab provides sufficient protection against omicron, although early reports out of South Africa suggest that antibodies from the vaccine may be up to 40 times less effective against the new variant than the original strain.

 

All in all, investors appear rather confused as to what to make of the latest variant, and remain largely in the dark as to its potential impact on public health and the global economy. While fears have generally subsided somewhat in the past few days, the limited reaction among currencies at least suggests that market participants remain in a rather cautious mood. The safe-haven Japanese yen has retreated, although remains only around half a percent or so away from last week’s two-month high. The US dollar index has also edged lower in the past couple of days, as inventors remain slightly torn over whether the Federal Reserve will speed up the pace of tapering at its FOMC meeting next week. US inflation data on Friday may have a big say on the matter, with another multi-decade high expected by economists.

Meanwhile, emerging market currencies largely extended their gains this morning, as investors greeted the news out of Pfizer in a positive fashion. Indeed, almost every EM currency has rallied against the US dollar in the past week, both in response to easing omicron fears and perhaps in expectation that most of the world’s major central banks will perhaps not raise interest rates as quickly as initially anticipated. The Bank of Canada held interest rates steady yesterday, and while they didn’t close the door to a rate increase in January, they far from hinted at one either. Tighter restrictions in the UK have all but eradicated the chances of a December rate increase from the Bank of England (futures are now pricing in just 6 basis points of hikes by the end of the year). The chances of a hawkish tilt from both the Fed and ECB at their meetings next week have also fallen in the past few trading sessions, and that is likely to continue to present an bullish environment for EM currencies in the immediate-term.