Pound dips below 1.35, Omicron surges

The British pound has started the New Year in negative territory. GBP/USD has dipped just below the symbolic 1.35 level.

Pound benefitting from strong risk appetite

The British pound ended 2021 with a winning week, gaining 1.03%. It was the second week in a row in which GBP/USD gained over 1%, as the risk-sensitive pound continued to make inroads against the safe-haven US dollar. On Thursday, GBP/USD rose to 1.3520, its highest level since November 10^th.

The catalyst driving the pound’s rally has been strong risk appetite, which hasn’t waned despite the explosion in the number of Omicron cases. The UK has been setting new records of Covid-19 cases as Omicron rages, and a government study estimates that 1 in 10 people in London is infected with Covid. The markets have remained optimistic, noting that Omicron is less severe than previous variants of Covid, but there are concerns that Omicron could lead to a huge strain on hospitals. Meanwhile, industries and transport networks are reporting staff shortages as sick workers self-isolate, which will weigh on activity in the services sector.

The government has not introduced new health restrictions, but that could change if hospitalisation rates move higher. Prime Minister Boris Johnson will deliver an update on restrictions later today, and his comments could move the pound. If the government does announce new restrictions, investors could react negatively and extend the pound’s losses.

After a light economic calendar during Christmas week, there are key events on both sides of the pond this week. The markets will get a look at PMIs in both the US and the UK, and the US releases nonfarm payrolls at the end of the week. The December NFP is expected to jump to 400 thousand, up from 210 thousand in November.

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GBP/USD Technical Analysis

• GBP/USD has support at 1.3426 and 1.3329
• There is resistance at 1.3585 and 1.3647

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