The sell-off of the pound sterling against the euro and the dollar should disappear

  • Plan B to hit the business
  • GBP is correcting below
  • As expectations for a rate hike at the Bank of England collapse
  • Stabilization of market sentiment supports the pound

Image by Andrew Parsons / No. 10 Downing Street.

The British pound has lost value compared to most currencies hit by the sudden new Covid-19 measures that threaten to slow the UK economic recovery, but losses may soon give way to consolidation as recent events are incorporated into lower currency values.

British Prime Minister Boris Johnson on Wednesday announced the implementation of Government B’s plan to combat the spread of the virus:

  • Whenever possible, employees will be required to work from home.
  • Vaccine passports will be required to enter major events.
  • The use of a mask will be required in additional settings

The order to work from home poses the greatest risk to the economy, as it diverts costs away from businesses concentrated in business districts such as the City of London and the West End.

“The new restrictions are a big setback for businesses, especially hospitality and retail businesses that are in a critical period of trade, as well as other businesses such as transportation,” says Matthew Fell, CBI’s director of policy at CBI, at response to Announcement Plan B.

The exchange rate of the pound against the euro fell by a substantial 0.75% on the day of the announcement, hitting a monthly low of 1.1626.

The exchange rate of the pound against the dollar fell to a new annual low of 1.3166.

Pound doesn't like new covid rules

Above: Sterling fell on December 8 compared to all of its competitors. Image (C) Pound Sterling Live.

  • Estimated publication rates:
    Pound Sterling to Euro: 1.1658 / Pound Sterling to USD: 1.3202
  • High Street Bank rates (indicative): 1.1430 1.2932
  • Specialist pay rates (approximately: 1.1600 1.3136
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“The pound is being sold off on potential Christmas restrictions on Covid & WFH / Plan B, leading to a pullback in BOE hike expectations for December. The pound is expected to continue to put pressure on both the US dollar and other G10s. the end, ”says Neil Jones, head of foreign exchange sales for financial institutions at Mizuho.

The introduction of the new restrictions means that the UK will lose its status as one of the “freest” developed economies in terms of Covid restrictions; The new measures will close any gap in the UK’s outperformance relative to the eurozone, where countries are facing tougher measures.

This decline in market expectations for economic performance could explain at least some of the sell-off.

Meanwhile, analysts are unanimous in their expectations that recent events will give the Bank of England a reason to avoid a rate hike on December 16.

“For the pound sterling, the increased likelihood of economic mobility constraints comes just a week before a carefully balanced meeting of the Bank of England,” said Darag Maher, head of US monetary strategy at HSBC. “Our economists expect that the uncertainty over the Omicron option will encourage policymakers to be patient.”

Maher says the introduction of Plan B will encourage doves in the Bank’s Monetary Policy Committee and means that rates will not be raised for the first time until February.

The question for the pound sterling going forward is how much lower the rate hike expectations on the horizon will diminish.

At the time of writing – following news of further restrictions – the likelihood of a rate hike in December is set at 0% per IOS markets, up from 33% a day earlier.

At present, expectations of a rate hike in December have been completely dashed, which may allow setting a floor for sterling exchange rates.

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Of course, now the market can swallow expectations of the February increase, and this could be a source of further weakening of the pound.

But with a few months left until February, markets will be aware of the UK’s high inflation and strong employment structure, which means a rate hike remains high in early 2022.

“Key figures for next year’s rate hikes remain intact, with inflation and labor force data rising surprisingly. Despite the delay, we still expect the same rate hike trajectory as before. We expect the next two rate hikes in May and November 2022. , so the bank rate will hit 0.75% by the end of 2022, ”says Sonali Punhani, UK chief economist at Credit Suisse.

The pound fell after Prime Minister Boris Johnson came out on Wednesday with plans to impose tougher restrictions on Covid-19 as it came under intense political scrutiny over allegations that a Christmas party was held in Downing Street in November. 2020, when such gatherings were banned.

Despite denial that this had happened, irrefutable footage emerged Tuesday night showing that the prime minister’s closest aides were aware of the party.

During the storm, journalists from numerous publications and broadcasters reported that Plan B rules had been advanced, and some argued that the move was part of a political distraction tactic.

But at this stage, further measures are distant.

Incoming data, initial research on the new variant, and anecdotal evidence from health professionals in South Africa continue to suggest that the Omicron variant will not be the “game changer” that was originally feared.

This should help create an enabling environment that can support the exchange rate of the pound.

Tedros Adhanom Ghebreyesus from WHO said in a news conference that his organization is seeing some signs that the Omicron option is softer than Delta, but not final. A source.

European Center for Disease Prevention said all Omicron cases are asymptomatic or mild so far. A source.

Netcare CEO Richard Friedland said the group’s 49 South African hospitals report that only 2% of patients are on ventilators, and these are mostly trauma patients who accidentally test positive for Covid-19.

“While we are fully aware that this is just the beginning, if this trend continues, it might seem that with a few exceptions for those requiring tertiary care, the fourth wave could be adequately cured at the primary health care level,” said Friedland … A source.

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Laboratory studies from South Africa have shown a significant decrease in the effectiveness of protection against omicron with vaccines and previous infections.

But Dr. Alex Segal of the African Health Research Institute said this is good news:

“A previous infection followed by vaccination or revaccination is likely to increase the neutralization rate and is likely to provide protection against severe illness with Omicron infection.”

The findings are consistent with what most scientists said: the vaccines will be less effective, but they will still provide protection against serious illness, especially after the introduction of booster shots.

“Most vaccinologists agree that current vaccines will continue to protect against severe illness and death in the face of Omicron infection,” said Professor Willem Hanekom, executive director of the African Institute for Health Research.

Pfizer said the third dose of their vaccine increased neutralizing antibodies 25 times against the Omicron variant compared to two doses. The level is comparable to that observed after two doses against the original virus.

They believe that two doses should still protect against serious illness.

Markets are looking more confident as new information suggests vaccines will prevent the need for tough economic constraints.

The pound is a “risky” currency that tends to outperform the euro and the dollar during periods of economic optimism, so further growth in markets in the coming days and weeks may well support the currency.

“Sterling is a typical risk-taking currency that does well when stock markets rally and suffers when they fall,” says George Vessey, currency strategist at Western Union.

There seems to be a lot of bad news “in value” for the pound right now, and consolidation in the short term is increasingly likely.

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