Omicron is forcing the Bank of England to abandon plans to raise the interest rate in December, but what if the new COVID-19 variant is not as deadly as the media say? Let us discuss the market outlook and make up a trading plan for EURGBP.
Weekly pound fundamental forecast
Starring: COVID-19, lockdowns, recession, monetary stimulus. Everyone has seen this “film” and knows its ending. Unsurprisingly, the emergence of a new COVID-19 variant has scared investors so much. If central banks really believe that ultra-easy monetary policy will solve all problems, then financial markets will at least reject normalization. Most of all, this will affect those currencies whose issuers discussed the possibility of raising rates. Among them, the British pound. Its price fell to 11-month lows against the US dollar after the Omicron news.
The South African variant of the coronavirus has reduced the Fed’s chances of aggressive monetary restriction in 2022. However, Jerome Powell’s speech to Congress in which he announced the rejection of the mantra about the temporary nature of high inflation and called for a quick QE tapering increased the likelihood of restriction. On the contrary, the financial markets were not impressed by the speeches of the Bank of England officials. New MPC member Catherine Mann, who voted in November to keep the interest rate at 0.1%, said there is so little information about Omicron that it is too early to talk about the timing and extent of the monetary tightening. As a result, the chances of a rise in borrowing costs at the BoE meeting on December 16 fell to 50%.
Uncertainty prevents the Bank of England from making important decisions and the sterling from growing. At the same time, neither MPC nor OECD officials deny that the UK is and will continue to face high inflation. The OECD raised its US and UK CPI forecasts for 2022 to the highest value among any developed country in the world.
OECD inflation forecasts
Source: Financial Times.
The situation looks complicated indeed. If BoE starts to raise the interest rate, it could significantly slow down the economy. Especially with potential lockdowns due to Omicron. If the Bank of England continues to watch actively growing inflation passively, it will get out of control. What decision to make? When in doubt, don’t do anything. It seems that investors are increasingly convinced that Andrew Bailey and his colleagues will remain passive at the December meeting and are starting to sell GBPUSD.
Positive news from the UK economy and from the EU (which welcomes the issuance of new fishing licenses to French fishermen by London contributing to the reduction of the degree of Brexit tension) is completely ignored. Sterling is frightened not only by Omicron, but also by the correction of US stock indices. One of the reasons for the correction is the return of the topic of the public debt ceiling. The government funding deadline is December 3, and Congress needs to work very hard to avoid default. The pound, which is jokingly called the Great British Peso (GBP), should react this time to the deteriorating global risk appetite.
Weekly EURGBP trading plan
I want to believe that Omicron will not be as deadly as the media say. If this assumption is confirmed, the chances of the interest rate hike in the coming months will increase, which will lead to a drop of EURGBP price. A successful test of the support at 0.85 will serve as the reason for entering sales.
Price chart of EURGBP in real time mode
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