According to the Market Matrix (MarketMatrix.net), although the pound/dollar has fallen to its lowest level since mid-November last year, the agency expects the pound to fall further as the United Kingdom (GBR) tightens restrictions again in an attempt to contain the spread of the epidemic (Covid-19).
British Prime Minister Boris Johnson has advised people to work from home to curb the spread of the Omicron variant, and the pound will see its first annual decline since 2018. Tightening restrictions has raised fears of a weak economic recovery in the country and forced traders to cut back on bets on Thursday's rate hike by the Bank of England (BoE) – which appeared to be a foregone conclusion just a few weeks ago.
Mizuho Bank, Mitsubishi YP Financial Group (MUFG) and Canada's Imperial Bank of Commerce (CIBC) expect a further gbp/usd decline to 1.30 or lower in the coming weeks, while sentiment in the options market is close to its most pessimistic level in 12 months.
Dark December: The pound is close to its 2020 minimum as Johnson announces new restrictions _By Bloomberg
Unlike other major currencies, traders have had to recalibrate their expectations of central bank policy. Parts of Europe face a tighter lockdown, and the European Central Bank (ECB) will no doubt maintain a dovish stance. In the United States, hawkish expectations of the Federal Reserve continued to strengthen, boosting the dollar.
Neil Jones, head of foreign exchange sales at Mizuho's financial institution, said: "Until recently, we also expected interest rates to be raised in December and did not expect the UK to implement lockdown measures. Now, GBP/USD is expected to fall to 1.295, the lowest level since December. ”
Traders were nervous, and the cost of hedging the pound's volatility reached its highest level in more than 9 months. Meanwhile, money market traders are betting that borrowing costs won't rise until February.
Lee Hardman, strategist at Mitsubishi Nikkan, said: "Cautious comments by BoE officials and further COVID-19 restrictions mean it is more likely to delay rate hikes until the impact of Omicron is clearer. The pound is expected to fall to its lowest point since November 2020, when fears were widely held that a UK-EU Trade Deal could not be reached. In contrast, we expect the Fed to accelerate tapers next week. ”
Ibrahim Labari, head of global foreign exchange analysis at CitiGroup, said the gbp/dollar's least popular G10 currency pair, with a fair value of $1.29, is more than 2 percent below current levels.
Not everyone is so pessimistic, though. Barclays analyst Emile Dalí said that while we expect the Bank of England to start raising interest rates in February, the passage of Thursday's meeting will not disappoint "the financial markets very much". "We think the pound will benefit from a peak in inflation in the first half of next year," she said. And Britain's economic growth is actually relatively resilient. ”
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