Sterling hits new 2021 lows on Covid restriction reports

Sterling fell to a new 2021 low against the dollar on Wednesday as expectations that the Bank of England will raise interest rates next week waned amid reports tougher restrictions against Covid-19 were in the offing. The pound also fell against the euro.

Britain could implement tougher Covid-19 measures, including advice to work from home, as early as Thursday in a bid to slow the spread of the emergent Omicron variant of the coronavirus, according to media reports.

Money markets are now assigning only a 46 per cent probability of a 15 bps rate increase next week, down from 58 per cent before the news and down from nearly 70 per cent probability two weeks ago.

The Bank of England (BoE) may hold off again next week on becoming the world’s first big central bank to raise interest rates from their pandemic lows due to the spread of the Omicron strain.

European shares bounce back after volatile week

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Defensive sectors lift European shares after two-day rally

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European markets retreat in the face of Omicron variant

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European shares hit over one-week highs as Omicron worries fade

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Limits

“The imposition of these restrictions – which are, we think, only a relatively small tightening of limits – is likely enough to keep the BoE from hiking next week as they will prefer to wait until the February meeting,” Scotiabank strategists said.

Against the dollar, the pound slumped 0.5 per cent to its lowest levels since December 2020 at $1.3162. Versus the euro, the pound weakened 0.7 per cent to 85.34 pence.

The US Federal Reserve meets next week, with policymakers flagging in the run-up that an increase in the pace of stimulus tapering is likely, which would set up the possibility of earlier rate rises. – Reuters