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New Covid variant strikes fear across markets

Jeremy Thomson-Cook
Jeremy Thomson-Cook 29 November 2021

GBP: Sinks to new 2021 lows versus $

EUR: Covid restrictions increase

USD: Inflation hits 30 year high

Sterling

Sterling fell to a fresh 11-month low versus the $ on Friday as risk assets registered steep falls right across the board. The sell-off followed the overnight news from South Africa of the emergence of a new Covid variant “likely to evade immune response from vaccine and prior infections” later to be declared a “variant of concern” and named Omicron by the WHO.

With liquidity extremely thin due to the Thanksgiving holidays the markets were swift and brutal in their reaction. Oil fell 12 %, Wall St had its biggest down day for the year and the US volatility index (VIX) gained over 20%. The pound also traded down to a 2-week low versus the euro as safe haven flows helped boost the single currency.

With a very light UK economic data calendar scheduled for this week, sterling will largely remain at the mercy of broader market risk sentiment BoE governor Bailey is scheduled to speak on Wednesday. UK/EU Brexit trade talks are set to continue Friday with tensions rising after UK's Frost said that the UK is ready to use Article 16 as the gap between the EU and the UK is still 'significant'.

Euro

Following rapidly increasing Covid restrictions across Europe, euro weakness continued last week, with the single currency touching its lowest levels against sterling since Feb 2020 before Friday’s huge risk off moves helped the euro bounce back by over 1.5% from its lows.

Economic output worries due to the new restrictions are weighing heavily on the currency and markets are eagerly awaiting an announcement due this week from the new German coalition regarding tighter Covid restrictions. Inflation and Retail Sales data slated for this week are the highlights of a fairly busy economic calendar.

There are numerous ECB members scheduled to speak this week, in particular ECB President Lagarde due both Monday and Friday.

USD

The dollar index fell by over 1% on Friday despite the recent batch of strong US economic data. Having traded fresh highs for the year earlier in the week the $ fell sharply on Friday as market participants shunned the buck in favour of the usual safe haven flows, with the Japanese yen and Swiss franc both gaining close to 2%.

The highlight of the US economic calendar this week is the US monthly employment report scheduled for release on Friday. Another healthy jobs report will only add to the already increasing market belief that the US Fed is behind the curve with its interest rate policy.

There are numerous Fed speakers due this week, in particular both Treasury Secretary Yellen and Fed Chair Powell due Monday and Wednesday.

Market rates

Today's Interbank Rates at 08:45am against sterling movement vs Friday.

Euro

€1.183

US dollar

$1.333

Australian dollar

$1.867 ↓

South African rand

R21.51

Japanese yen

¥151.1

Have a great day.