The pound fell ahead of the weekend due to fading expectations of a Bank of England interest rate hike and risk off sentiment in global markets. The term “risk off” refers to traders and investors’ sentiment in the financial markets where they tend to reduce their risk exposure and focus on protecting their investments. One of the key concerns for markets is the discovery of a new Covid variant in South Africa that could be more transmissible than previous ones.  

Traders turned to safe-haven currencies such as the US dollar, yen, and Swiss franc instead of riskier assets, such as the Australian dollar, South African rand or emerging market currencies, which were sold.

New Covid-19 variant

The new coronavirus variant in South Africa has created serious concerns as there are fears the country may face a severe fourth wave and that the virus could spread internationally. More and more countries are banning flights from South Africa and neighbouring countries, while the EU has proposed to ban flights from the region. The UK, the Netherlands and Japan have stopped flights from southern African nations including South Africa, Botswana, Namibia, Zimbabwe, Eswatini and Lesotho. The above nations and Mozambique are on the red lists of Singapore, Italy and Israel.

The World Health Organization (WHO) has said it will take a few weeks to determine how transmissible and how big its impact will be, but they are definitely concerned.  100 cases have already been detected in South Africa. The variant, unlike previous ones, is the most heavily mutated version, which means vaccines may not be as effective. The new variant, (B.1.1.529) not yet named, has possibly evolved during a chronic infection of an untreated HIV/AIDS patient, Francois Balloux, director of the UCL Genetics Institute, explained. Immuno-compromised people can harbour the virus for longer, scientists said.

The new variant has driven traders to buy the yen and Swiss franc and it could further boost the US dollar. The pound is low as it is losing against the safe havens but is higher than riskier currencies. The euro has also been preferred instead of the pound, which suggests that investors focus on bigger and more global events.

 What to expect in the currency market?

Markets will keep a close watch on research of the new variant, as scientists strive to understand how vaccines and prior infections can prevent contagion and the beginning of serious illness. Any bad news regarding the new variant and its transmissibility will increase fears about the global spread of the virus and a second cycle of the pandemic.

The pound fell very low against the euro when the pandemic started last year and if the same is repeated with a second cycle, then the pound will suffer losses against safe-haven currencies. On the other hand, it could rise against the Australian, Canadian and New Zealand dollars and emerging market currencies.

If vaccines are proven to protect against this new variant, then markets will become less pessimistic, and could return to levels seen on Thursday 25 November, before the news about the South African variant was announced.

Central banks considering raising interest rates, such as the Bank of England, may reconsider tightening their policy too early due to the new variant uncertainty. If expectations for a December rate hike in the UK decline further, then the pound could lose recent gains.

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