The pound has dropped below 1.32 and is trading at the lowest levels in a year, on the back of reports that the UK government will be implementing a new set of COVID restrictions to tackle the novel Omicrom variant. ‘Cable’ traded as high as 1.42 in the summer but has since seen a rapid decline.
The UK has now registered 568 cases of the Omicron COVID variant of concern, which is pressurising Boris Johnson to consider the government’s “Plan B”, which could include vaccine passports for indoor settings and re-introducing mandatory work from home requirements. This would be in addition to the recent re-introduction of mandatory mask-wearing on public transport and in retails settings, as well as travel restrictions. The prospect of another winter period of restrictions and lost revenue for commerce is weighing on GBP.
Cautious Bank of England
As reported in last week’s FX review, UK central bankers are becoming increasingly cautious in their monetary policy approach. Despite the rising inflation level, the market is now expecting the Bank of England to not raise interest rates until much later in 2022, due to the uncertainty around the impact of Omicron. This delay in interest rate hikes has resulted in a GBP sell-off.
Whilst the FX markets are predominantly OTC and not exchange traded, we can use Commitment of Traders data from currency futures to gain an insight in how traders are positioning themselves in GBPUSD. The number of non-commercial (i.e. hedge fund) short contracts are now at the highest level in 2 years. This points to a bearish outlook, as speculators in the markets are selling GBP.
A Bloomberg survey of Economists may point towards a slightly more positive picture for GBP. The current consensus view is that GBPUSD will recover to ~1.38 by the end of 2022. Nevertheless, forecasts should be taken with a pinch of salt, as there is a lot of political and economic noise around the UK, as it tackles COVID, Brexit repercussions, and increasing pressure on the Conservative government.
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