Sterling’s Downward Trend Continues

GBP

Sterling continued its downtrend against both the euro and dollar yesterday as market sentiment remained risk-off, while traders sold the British currency in anticipation of the Bank of England opting to keep interest rates unchanged at this months BoE meeting.

Risk off market conditions have been caused by concerns relating to the latest Omicron Covid variant which has already forced a number of European countries to tighten Covid restrictions. There is a fear amongst traders that the uncertainty to the strain will bring to the UK’s economic outlook will result in the Bank of England opting to hold off on hiking interest rates until early next year defying market expectations of a December hike.

Comments from the CEO of drug maker Moderna that existing Covid-19 vaccines would be less effective against the Omicron strain of Covid also weighed on the risk sensitive British currency yesterday.

USD

The dollar rallied to fresh highs on Tuesday benefitting from a combination of its safe-haven status and hawkish comments from Federal Reserve Chair Jerome Powell.

Speaking at the US Senate Committee on banking and housing, Powell acknowledged that the risks of higher inflation had increased and stated that it was time to retire the word “transitory” when talking about inflation.

The comments from Powell are significant and reflect a clear shift in his opinion on inflation from the view that it is temporary to a view that it is now likely to require action from the Fed to bring under control. The expectation of the Fed ramping up its tightening of monetary policy has forced the dollar higher. Powell also signalled that it would be appropriate to consider wrapping up its QE taper a few months sooner than planned.

Economic Calendar

13:00 – GBP – Bank of England Governor Bailey speech
14:15 – USD – ADP Employment Change (Nov)
16:00 – USD – Fed Chair Powell testifies
16:00 – USD – ISM Manufacturing PMI (Nov)