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Pound Sterling / Euro Rate Will Only Stabilise When Markets Shake Omicron Fears

  • GBP/EUR hit by Omicron fears
  • Markets must stabilise if GBP/EUR is to follow suit
  • Fed's Powell also hit GBP
  • Says Fed remains on course to taper, raise rates

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The British Pound is caught in a phase of weakness against the Euro and Dollar linked to broader market fears surrounding the impact of the Omicron Covid variant, these fears must fade before a recovery can occur.

The Pound to Euro exchange rate is back below 1.18 following four successive days of declines that are linked to fears the Omicron Covid variant will spell another sharp global economic slowdown.

Global markets fell sharply Tuesday on the publication of an interview with Moderna's boss Stéphane Bancel who said he foresees a "material drop" in the effectiveness of existing vaccines.

But they regained some poise after BioNTech's Uğur Şahin - the inventor of the vaccine that Pfizer manufactures and distributes - said the new variant could lead to more infections, but vaccinated people will likely remain protected from severe disease.

Oxford University - who invented the vaccine distributed by AstraZeneca - also stabilised sentiment when they released a statement saying:

"Despite the appearance of new variants over the past year, vaccines have continued to provide very high levels of protection against severe disease and there is no evidence so far that Omicron is any different," Oxford University, developer of AstraZeneca's vaccine said in a statement Tuesday.

This is a binary risk on / risk off market driven by headlines and it is therefore difficult for foreign exchange analysts to give any guidance on currency direction as a result.

The Pound and foreign exchange markets could go either way on a single headline hitting a newswire.

Pound Euro volatility

Above: GBP/EUR 15 minute chart highlighting just how volatile and news-driven the market is at present.

  • Reference rates at publication:
    GBP/EUR: 1.1730 \ GBP/USD: 1.3259
  • High street bank rates (indicative): 1.1500 \ 1.2988
  • Payment specialist rates (indicative: 1.1670 \ 1.3193
  • Find out about specialist rates, here
  • Set up an exchange rate alert, here
  • Book your ideal rate, here

"GBP faces additional downside potential if financial market risk appetite worsens. GBP will need to trade cheaply to compete for foreign capital and recycle the UK’s current account deficit," says strategist Elias Haddad at Commonwealth Bank of Australia.

Scientists are currently assessing the Omicron variant and initial data on the effectiveness of vaccines will potentially be the most important piece of news for financial markets over the remainder of 2021.

Rough estimates from the large pharmaceutical companies suggest it could take up to three weeks for studies to come through, however the pressing nature of the variant means news could come sooner.

"We expect market participants to remain more cautious about risk taking until there is greater clarity over the potential impact from the new Omicron variant," says Lee Hardman, Currency Analyst at MUFG.

The Pound was on course to recover ground against the Euro alongside recovering markets before sentiment was again turned on its head, this time by Chair of the Federal Reserve Jerome Powell.

Powell said it would be "reasonable to think about wrapping up tapering a few months earlier" if fears regarding the Omicron variant proved to be overblown.

The Dollar jumped on the comments and markets fell back, the Pound went back down against the Euro.

The Fed began reducing the amount of bonds it purchased under its quantitative easing programme in November with a view to ending it completely in the first half of 2022, but the emergence of the Omicron variant saw investors begin to expect this time table to be extended.

That would mean the first rate hike would come later than had been expected heading into last Friday's Omicron selloff.

"Jerome Powell has provided a surprisingly hawkish stance, with the Fed chairman stating that he could see the tapering process speed up if the current Omicron fears prove ill-founded," says Joshua Mahony, Senior Market Analyst at IG.

Pound Dollar Powell comments

Above: GBP/USD 15 minute chart showing the impact of Powell's comments.

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Amidst fraught investor sentiment it was anticipated Powell would nod to the risks posed by another potential Covid wave linked to Omicron and sound an air of caution.

But his assertion that rising inflation means withdrawing supportive monetary policy must proceed appears to have come as a surprise.

"Another bout of commentary from Jerome Powell over the economic and inflation risks posed by this latest Covid strain highlight how the bank still remains in position to tighten policy further if necessary," says Mahony.

"We remain within a phase of uncertainty, with the Fed expected to adjust or reiterate their policy stance once the scientists provide greater clarity over this strain," he adds.

Brent Donnelly, who heads Spectra Markets, says he is now looking to sell the Pound-Dollar exchange rate on the Powell developments.

He says the exchange rate 'gapped' lower around the comments - a strong move that leaves gaps on a chart.

Donnelly says the move "sets up nicely for a short with a stop back up in the old equilibrium zone. That is, short around here, stop at 1.3333 for another big move lower over the next 48 hours on uberhawk Fed."