Currency outlook: Emergence of Omicron rocks currency markets at the end of 2021

OMICRON VARIANT: Actually heped to reverse the downtrend in the euro currency.

Euro
EUR/GBP: Unmoved at £0.84
EUR/USD: Up from $1.12 to $1.13
The euro has fluctuated over the past month, with the single currency initially struggling amidst concerns over a resurgence of Covid cases in Europe.
However, the emergence of the Omicron Covid variant then actually helped to reverse this downtrend as concerns over the new strain helped to limit the pricing in of policy divergence between the European Central Bank (ECB) and its peers, on the assumption it would result in a more cautious outlook from the central banks.
The euro also found support in the wake of the ECB December policy meeting, in spite of the bank announcing plans to temporary increase its asset purchases to cushion the impact of winding down its pandemic-era stimulus in March.
However, the subsequent announcement from most European nations that they would be imposing new restrictions to combat the spread of the Omicron variant then weighed on EUR sentiment towards the end of December.
Looking ahead, the focus for EUR investors will be on how long these restrictions remain in place, with the euro potentially getting off to a poor start in 2022 if it looks like these measures could last more than a couple of weeks.
Pound
GBP/EUR: Down from €1.19 to €1.18
GBP/USD: Up from $1.33 to $1.34
The pound also traded in a wide range over the past four weeks, as the currency was rocked by the Bank of England’s (BoE) latest interest rate decision.
Ahead of its December policy meeting, GBP investors were initially confident the BoE would raise interest rates, before these expectations quickly faded with the emergence of the Omicron variant, with analysts assuming the bank would opt to wait for more information about the new strain before acting.
This resulted in Sterling spiking after the BoE surprised markets by ultimately choosing to hike interest rates following its final policy meeting of 2021.
Elsewhere we have seen the introduction of the UK government’s ‘Plan B’ Covid restrictions apply some pressure to GBP exchange rates in recent weeks, while speculation over further measures have also infused volatility into the pound.
Turning to the start of 2022, we might see the introduction of new Brexit customs regulation place some pressure on Sterling, as they threaten to further disrupt trade between the UK and EU.
US Dollar
USD/GBP: Unmoved at $0.74
USD/EUR: Down from €0.89 to €0.88
The US dollar climbed to new year-to-date highs over the past month as renewed Covid fears tied to the Omicron variant, gripped markets and bolstered the appeal of the safe-haven US dollar.
Reinforcing the upside in the ‘greenback’ was growing speculation the Federal Reserve might accelerate the tightening of its monetary policy, particularly after Fed Chair Jerome Powell said the recent spike in US inflation can no longer be described as ‘transitory’.
While the Fed ultimately confirmed it will accelerate the tapering of its pandemic-era stimulus, Powell’s comment’s suggesting it would be ‘inappropriate’ to begin hiking interest rates before the tapering process is complete, undermined hopes for an earlier hike and dented USD exchange rates.
The US dollar also gave up some additional ground in late December as reports indicating that Omicron results in fewer hospitalisations than previous Covid strains, cheered markets at the expense of the ‘greenback’.
The US dollar could quickly bounce back at the start of 2022 however, on the expectation that Omicron restrictions might dampen global growth prospects for the first quarter of the year.

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