Sterling has started the new week lower as Omicron fears have gripped markets. The threat of new lockdowns has rattled markets across the world with all risk sensitive currencies, such as the pound, falling. With reduced central bank support and the ongoing pandemic, investors want to avoid unnecessary risks ahead of the Christmas period.

Global stock markets were also lower partly due to news that President Joe Biden's Build Back Better package did not pass the Senate. Safe-haven currencies such as the yen, US dollar and the Swiss Franc rose as risk-off sentiment turned investors to less risky assets. As it is commonly noted, the pound was lower against the euro which seems to benefit when global markets are down.

Sterling was however higher against commodity currencies such as the Australian and New Zealand dollars.

Risk aversion in global markets

Lockdown risks are rising in the UK as Health Secretary Sajid Javid has not ruled out stricter measures before Christmas after health advisers suggested that more restrictions were necessary to control the rising number of coronavirus infections. Countries such as The Netherlands will enter a full lockdown until at least the 14th of January, while various European countries are considering more restrictions to fight the spread of the virus. Reports suggest that tighter restrictions are expected to be introduced in Germany too.

The recent decline of the pound was driven by a risk aversion mood in global markets due to Omicron. The pound fell as is one of the risk sensitive currencies that falls when global markets seek to avoid risk and traders put their wagers on safe-haven currencies. For financial markets, especially foreign exchange markets, Omicron’s impact on the economy is considerable, and it could reverberate into the new year. Traders are concerned about Omicron’s effects on global growth at a time when central banks are focused on withdrawing support, including the Federal Reserve which will proceed to withdraw stimulus over the coming months.

Inflationary pressures

The introduction of new restrictions comes at a time where inflationary pressures persist, with the global economy struggling to return to pre-pandemic levels following 2020’s restrictions.

According to analysts, financial support programmes to mitigate against pandemic measures will become more costly, and central banks would want to avoid them.

Global growth risks have increased, as President Joe Biden's Build Back Better stimulus package has failed to pass, after Senator Joe Manchin said he cannot vote for the $1.75 trillion package as it will increase the country’s debt and push inflation higher. Americans are already struggling with high inflation taxes and utility bills.

The removal of accommodative monetary policy by many major central banks will affect risk assets and emerging markets, as many developing market currencies have weakened the last six months.

The pound will strengthen if risk sentiment improves, but, at the moment, due to the ongoing pandemic, uncertainty will continue.

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