Pound falls to 12-month low

The British pound has extended its losses and has fallen below the 1.32 level. Earlier in the day, GBP/USD dropped to 1.3161, its lowest level since December 2020. The pair is down 0.36% on the day.

There are no tier 1 events out of the UK until Friday, but nevertheless, the pound is in negative territory for a second straight day. Nothing seems to be going right for sterling, which has shed 3.5% of its value since November 1^st. There has been significant volatility in the markets due to the Omicron variant of Covid, but the shift in market sentiment from panic to cautious optimism over Omicron hasn’t helped the pound, which is stuck in a nasty downturn that started in late October.

Omicron fears recede

There were fears that Omicron would trigger another lethal wave of Covid, but these concerns have eased, following reports that the symptoms caused by Omicron have been less severe than previous Covid variants. Still, Omicron is more contagious than the other variants and has become perhaps the number one key risk for markets. The UK government is reportedly drawing up plans for further restrictions (“Plan B”), which if put into place, will likely put a crimp in economic activity and weigh on the British pound.

The focus on Omicron comes at a time when central banks are under pressure to raise interest rates. This week, the Reserve Bank of Australia and the Bank of Canada maintained monetary policy, with both citing Omicron as a new uncertainty. It seems that the two banks, both of which have little appetite to raise rates just yet, are using Omicron as their crutch to kick the rate can down the road. It will be interesting to see if the Bank of England takes the same approach at next week’s key policy meeting.

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GBP/USD Technical Analysis

• GBP/USD has support at 1.3161 and 1.3091
• There is resistance at 1.3336 and 1.3441

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