The pound has weakened due to the new Covid restrictions, and it could fall further, analysts have said. It failed to retain its momentum as the latest coronavirus headlines have put more pressure on the British currency.

Health Secretary Sajid Javid said that the Omicron variant is spreading at a "phenomenal rate" in England, but no Omicron-related deaths have been confirmed yet.

Covid threat is raised to Level 4

On Sunday, British Prime Minister Boris Johnson warned that the UK faces the Omicron "tidal wave" and he vouched that all eligible adults in England will receive the booster dose by the 31st of December. Downing Street explained that without the protection of a third dose, NHS beds would "quickly fill up and the long term damage to the economy and the NHS efforts to bring down the backlog will be even greater." The UK has now raised the Covid threat to “Level 4”, which is one level below the maximum.

Nicola Sturgeon also said on Sunday that the Scottish government will ensure that all adults have access to a booster dose by the end of the year, while Mark Drakeford said the Welsh government will try to accelerate its vaccination program.

3,137 Omicron cases have been reported in the UK on Sunday, which marks a rise of over a thousand since the previous day.

The pound could find it difficult to regain its footing as investors are evaluating the potential effect of the Omicron variant on the Bank of England's (BoE) policy decisions, which will be announced later this Thursday.

Plan B and Bank of England

The announcement of the government’s “Plan B” restriction measures to fight the spread of the Omicron virus was quickly followed by news that a so-called “Plan C” may soon follow, which will have a huge impact on the UK economy and currency as it adds to the uncertainty and potential delays of an interest rate hike by the Bank of England. 

According to analysts, BoE policymakers have already noted that the UK economy has likely met the requirements for an interest rate rise, but the Omicron variant adds significant uncertainty to the economic outlook and will likely mean that a rate hike will be delayed until February.

It’s possible that this week the BoE will leave the Bank Rate at 0.10% and that will push the pound lower. However, since markets are already expecting the bank to keep interest rates unchanged, the effect on the British currency will be limited.

The decision on whether to raise interest rates next week will very much depend on the current uncertainties about the health and economic impact of the Omicron wave, so the Bank is expected to keep a more cautious attitude and wait for more information before deciding to increase the cost of borrowing.

The pound is also expected to remain vulnerable ahead of the latest European Central Bank (ECB) meeting, which could allow the euro to strengthen further. The ECB is expected to announce an increase of its monthly bond purchases as part of its quantitative easing programme called Asset Purchase Facility (APP). However, the ECB could delay this decision due to the current uncertainties.

While expectations have been lowered, and February is most likely the time that the Bank of England might decide to lift interest rates, any surprise decision to lift the rate this week would provide a considerable boost to the currency.

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