The pound dropped to its lowest level in more than a year against the dollar on Wednesday as the prospect of fresh coronavirus restrictions clouded the outlook for the UK economy.
Sterling traded 0.5 per cent lower to $1.317 after the Financial Times reported that Boris Johnson is set to implement the “Plan B” of further restrictions, including requiring vaccine passports for large venues and an order to work from home in a bid to curb the spread of the Omicron variant. The UK currency also declined against the euro, hitting £0.856.
Analysts said such a move by the government would increase uncertainty over the prospects for the economy and could discourage the Bank of England from raising interest rates — for the first time since the pandemic began — later this month.
“A further tightening of restrictions with people being asked to work from home will dampen the growth outlook,” said Lee Hardman, a currency strategist at MUFG. “It means that the Bank of England is even more likely to hold off from raising rates until February.”
Sterling had already fallen this month, particularly after Michael Saunders -— one of the BoE’s more hawkish rate-setters — said last week that the emergence of Omicron meant there were “advantages” to waiting before tightening monetary policy.
The odds of an increase in borrowing costs to 0.25 per cent are now priced by markets at roughly one in three, compared with about 75 per cent before the new variant was discovered.
The pound’s fall highlights the differing impact of Omicron on the expected path of monetary policy on opposite sides of the Atlantic. Federal Reserve chair Jay Powell last week signalled his support for a quicker withdrawal of the US central bank’s huge bond-buying programme, paving the way for earlier rate rises, despite the threat posed by the rapid spread of Omicron.
Investors are now betting that the Fed’s first rate rise will come in June, four months after the first BoE increase, now priced for February. Even so, recent shifts had raised the possibility that the Fed could move first, Hardman said. That would mark a big turnround since last month’s BoE meeting, when markets had been fully pricing in a rate rise only for the central bank to surprise investors by staying on hold.
