Despite Omicron concerns, the pound has hit its highest level against the US dollar since November and its highest level against the euro since February 2020.

Bank of England rate hike

The expectation of inflation rising has helped to push the pound higher as traders now anticipate the Bank of England to hike interest rates in February, after raising them to 0.25% in December. Economists believe that it’s a close call as Omicron is expected to hit economic growth this winter. The economic impact of Omicron might not be huge or long-lasting, but the Bank still needs to tread carefully. While the markets expect the Bank of England to hike rates again at the start of February, some analysts think it might wait a little bit more, until May.

Businesses are facing staff shortages while consumer spending has been much lower in the end of December. Analysts believe that the Bank might wait for more data, and as such a rate hike in May appears to be more likely.

UK Covid cases have peaked

It is beginning to look quite hopeful experts have said, as there are hopes that the UK Covid cases have peaked in all parts of England. New case numbers are starting to fall in the South East and the East of England, and in London. According to official records, as of January 8, new case numbers are beginning to fall in the South East and the East of England, as well as in London, which peaked before Christmas. Cases are rising in other regions but at a much lower pace.

Professor Kevin Fenton, Public Health England’s regional director for London, told the Sky News that the Omicron wave has now peaked in London. He warned that ONS data showed that almost one in 10 Londoners are still infected with the virus and the pandemic is not yet over.

While case numbers and hospitalisations are dropping, scientists have highlighted the significance of vaccines which are believed to have prevented intensive care wards, and the NHS, from being overwhelmed.

The Prime Minister confirmed that ministers are considering reducing the self-isolation period for fully vaccinated people who test positive for the virus to five days from the current seven.

The prospect of a drop in cases suggests that an economic rebound into the second half of Q1 is possible and this in turn will validate the prospect of a February interest rate hike.

Economists have noted that the most negative economic impact of Omicron is the rising number of self-isolation cases and weak consumer sentiment. The combination of the two could further slowdown economic activity.

If there is an economic rebound, then the Bank is expected to raise interest rates and markets are pricing more than a 70% chance of another UK rate rise next month. The rise of US and UK bond yields has also offered support to the pound so far. Sterling remains the best performing G10 currency of 2022.

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