Sterling firmed on Thursday as the discovery of the first case of the Omicron variant in the United States weighed on the dollar overnight, but trading was choppy amid uncertainty about whether the Bank of England will hike interest rates this month.
Currency markets broadly lacked direction with the greenback receding further from its July 2020 highs. Trade was volatile as daily COVID-19 infections doubled in South Africa, where Omicron has quickly established itself as the dominant strain.
Comments from Fed Chair Jerome Powell on Wednesday that he and his fellow policymakers will consider at their Dec. 14-15 meeting a faster taper of stimulus, potentially opening the door to earlier interest rates hikes, failed to lift the dollar.
Closer to home, uncertainty on whether the Bank of England will raise interest rates also capped the pound’s gains.
The BoE said in November it would probably have to raise rates from an all-time low of 0.1% “over the coming months”, but policymakers have sounded increasingly divided on this prospect after the new coronavirus variant was detected.
Money markets were pricing in only 8 bps of rate hikes by the next meeting on Dec. 16 compared to 12 bps at the beginning of last week.
Sterling edged 0.2% higher to $1.3307 after hitting a fresh 2021 low of $1.3195 on Tuesday. Against the euro, the pound rebounded from a two-week low by a similar margin to stand at 85.10 pence.