The pound held above the lows of Friday when investors sold the currency after the discovery of the Omicron coronavirus variant. On Friday, traders avoided risky assets, and the British currency failed to rise, but the sharp fall in the US Treasury bond yields pushed the greenback lower and helped the pound limit its losses against the dollar.

On Monday, Sterling stabilised against the US dollar and strengthened against the euro. Although the dollar remains strong at the start of the week, the GBP/USD has continued to rise higher as risk sentiment has improved.

Omicron variant and pound outlook

The Omicron variant was discovered in South Africa last week and has created concerns around the world as countries rushed to impose border controls. On Monday, markets were calmer as they digested the news of the variant and the risks. Sentiment towards the pound remained cautious, however. Analysts believe that the long-term outlook for the pound could be threatened by further lockdowns, which will affect expectations of a rate hike. Markets are expecting an interest rate increase of 8 bps by the Bank of England on 16th of December.

Ahead of the weekend, Sterling fell against the euro, yen and Swiss franc following the Omicron variant reports. With the threat of the ongoing pandemic and the possibility of new variants, some analysts believe that markets have overreacted, especially since cases in South Africa suggest that the variant causes mild symptoms to those infected by it.

While it is important to see how governments will handle this new variant and how they will respond to its spread, if it proves to be less aggressive than previous variants then it might be easier to control and less threatening than initially considered. So, a positive outcome would be news that Omicron is not as deadly, and the existing vaccines are effective against it. On the other hand, a worst-case scenario might mean that scientists will need to work on a new vaccine that is effective against Omicron.

How will the pound fare?

The pound might recover against the euro if global markets become more positive. Sterling could also benefit from the rise in coronavirus cases in Europe and the possibility of new lockdowns throughout the Christmas period. Some European countries have begun reimposing restrictions which will affect the Eurozone’s economic recovery. This might hurt the euro and boost the pound.

The news of the new variant and the increasing reintroduction of new restrictions could force the European Central Bank to extend its quantitative easing programme beyond the proposed end date of March 2022. Tuesday’s Eurozone inflation data, which are the focus of the Eurozone economic calendar, might be sidestepped as investors focus on news about the new variant.

In regard to the UK government’s plans, over the weekend, British Health Secretary Sajid Javid reassured the public that the government was nowhere near reimposing lockdown restrictions. Javid further announced that from Tuesday, face masks will be mandatory in shops and public transports. On Monday, junior UK health minister Edward Argar said that the government does not intend to tighten rules in the coming weeks.

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