As the prospect of new coronavirus restrictions cast a shadow over the outlook for the British economy, the pound fell to its lowest level against the U.S. dollar in more than a year on Wednesday.
After the Financial Times reported on Boris Johnson, the pound fell 0.5% to $1.317 Coming soon Further restrictive “Plan B” includes requirements for vaccine passports and work-from-home orders in large venues to curb the spread of Omicron variants. The British currency also fell against the euro, reaching 0.856 pounds.
Analysts said the government’s move will increase uncertainty about the economic outlook and may prevent the Bank of England from raising interest rates later this month-the first rate hike since the pandemic began.
“Further tightening of restrictions and requiring people to work from home will inhibit growth prospects,” said Lee Hardman, a foreign exchange strategist at Mitsubishi UFJ Financial Group. “This means that the Bank of England is more likely to postpone rate hikes to February.”
The pound has fallen this month, especially after Michael Saunders-one of the Bank of England’s more hawkish interest rate setters- Said last week The emergence of Omicron means that there is an “advantage” to wait before tightening monetary policy.
The probability of borrowing costs increasing to 0.25% is now priced by the market at about one-third, and before the new variant is discovered, the probability is about 75%.
The fall of the pound highlights the different effects of Omicron on the expected path of monetary policy on both sides of the Atlantic. Federal Reserve Chairman Jay Powell said last week that he supports a faster exit from the US Central Bank’s huge bond purchase program, paving the way for an early interest rate hike, even though the rapid spread of Omicron poses a threat.
Investors are now betting that the Fed will raise interest rates for the first time in June, four months after the Bank of England raised interest rates for the first time, and the current price is February. Hardman said that even so, recent changes have increased the likelihood that the Fed may act first. This will mark a major shift since the Bank of England meeting last month, when the market had been fully digesting interest rate hikes just to allow the central bank to keep interest rates unchanged, which surprised investors.