The pound was resilient against the US dollar and has risen to two-month highs. Last week it hit a 22-month high against the euro as the potential for more hikes by the Bank of England (BoE) offered support. Omicron concerns have eaten away at some of the pound’s gains against the euro.
The prospect of a BoE interest rate hike at the Bank’s February meeting has helped boost market expectations.
UK Prime Minister looking to reduce quarantine period
British Prime Minister Boris Johnson said on Monday that the government is considering the prospect of reducing the quarantine period from seven to five days. Since Britain was making progress against the variant, the government will look at reducing the days of isolation, but it warned that the number of hospitalised people was rising. The Prime Minister explained that "We've got to make sure that we see off Omicron. We're making great progress. (But) the 18,000 people with COVID currently in hospital... that's massively up, and the numbers are increasing.”
His comments did not have a noticeable impact on the pound.
UK companies remain optimistic
The latest survey from accountancy company Deloitte has showed that 37% of chief financial officers are planning to boost investment in 2022 and focus on growth despite Omicron concerns. Companies expect conditions and productivity to improve but persistent labour shortages remain a considerable risk. A high number of companies believe that trade conditions have been affected by Brexit.
Manufacturers have warned that Brexit will exacerbate costs amid concerns of persistent challenges relating to customs delays and red tape. Make UK, which represents 20,000 manufacturing firms across the UK has said that Brexit remains a central concern. In its 2022 Make UK/PwC senior executive survey of 228 firms, businesses have warned of damage from Brexit disruption which has been further complicated by the pandemic and rising costs.
GBP/EUR hits a 22-month high
Last week’s positive market sentiment favoured risk sensitive currencies such as the pound and pushed the euro lower. The euro was also lower due to the significant differences in policies by the UK and European central banks. Eurozone data did not help offer any support.
The pound rose further following the UK government’s decision not to introduce more Covid restrictions while BoE rate hike expectations boosted Sterling. Traders have now priced in an 82.5% chance of another interest rate rise at the bank’s meeting in February.
However, the rising number of Covid cases puts further pressure on the pound which has failed to sustain its 22-month high.
Week ahead: What to expect
Omicron will continue to impact on the British currency. If Covid cases continue to fall, then the pound will strengthen and vice versa.
On Friday, we get the latest GDP data, which is expected to have grown 0.4% in November and may help offer support to the pound.
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