The GBP/USD fell to its lowest level in a year following recent hawkish comments from the Federal Reserve Jerome Powell.
On Tuesday, Powell surprised markets by stating that it’s time to retire the term ‘transitory’ for inflation and expanded further on his comments yesterday. He explained that the threat of higher inflation was here to stay and the Federal Reserve would have to consider ending tapering (quantitative easing) earlier in 2022 to give them the option of raising interest rates sooner if necessary. The markets reacted as expected, with the dollar spiking 1% against the Pound – although since then we’ve had small gains breaking that low and it’s trading close to pre-Powell’s comments.
The Omicron variant has dominated markets across the world, with around 20 countries now reporting confirmed cases. So far, only mild symptoms and less hospitalisations have given optimism the mutation is not going to be as worrying as first thought. However, it will take a couple of weeks of further research before a clearer picture of the potential impact of this new strain is found.
As a result, the GBP/USD is trading around 0.5-cent off this week’s high but close to a 1-year low. The GBP/EUR is nearly 1 cent down from Monday but seems to have stabilised within a relatively tight short-term range. The EUR/USD has been trading within a very narrow range this week but continues to trade around the lowest levels since July 2020. Markets will be closely watching tomorrow afternoon’s US non-farm payroll figures for further direction on the dollar.
Generally, the Pound’s upside should be limited for now as Brexit talks seem likely to drag into next year and uncertainty will remain in the short term over the new Omicron covid variant. Furthermore, investors will continue to reassess whether or not the Bank of England will finally hike interest rates at this month’s meeting (16th Dec). December is typically a quiet month in the FX world, but with some key central bank interest rate meetings and this new covid variant around, we might be in for a more volatile run up to the Christmas break.
