BOE Rate Hike In Doubt Following New COVID Restrictions

Deja Vu In The UK
In a situation which was eerily reminiscent of this exact time last year, the UK government took the market by surprise last week with the announcement of a move to “Plan B” measures. The COVID restrictions, which are intended as a measure to prevent the need for a lockdown, have been introduced in the face of the rising Omicron outbreak in the UK. With government health advisers warning that the outbreak could lead to around 1000 hospitalisations per day by the New Year, the UK PM made the announcement and is set to make a further decision by December 18th on what restrictions will be in place over the Christmas period.

Work From Home is Back
The fresh measures include a return to Work From Home (WFH), where possible, and mandatory mask wearing on public transport and in indoor public areas, along with guidance on how to isolate from COVID contact. Crucially, the new measures also include the use of COVID passports to enter hospitality venues. The announcement has been met with widespread criticism from many who point out that the new measures will strike a crippling blow to the hospitality sector, which is only just recovery, during a vital time of the year when demand is typically higher. Additionally, with no hospitalisations in the UK (as far as we know) from the new strain and with no deaths globally, many argue that Omicron doesn’t warrant the return of restrictions.

Limited Market Impact So Far
In terms of market impact, the reaction has been fairly muted so far. GBP remains under pressure following heavy sales over recent week, while UK asset prices remain in demand following the sharp recovery off the lows printed late November, early December. Looking ahead, the greater impact is likely to come from, firstly, the Bank of England meeting next week and, secondly, if the outbreak worsens and lockdown risks grow.

BOE In Focus
Given the fresh uncertainty around Omicron and the return of restrictions, which early estimates suggest will cost the UK economy as much as $4 billion per month, the BOE seems likely to hold off from a rate hike next week. While expectations had been primed towards a December hike ahead of the Omicron outbreak, developments since then suggest that the BOE is likely to wait until the February meeting. The focus will therefore be on the guidance given at the meeting. If the BOE is seen keen to press ahead with tightening, this is likely to give GBP some lift near term. On the other hand, if the bank strikes a tone of caution around Omicron, this might dilute near-term rate hike expectations, weighing on GBP.

Technical Views
EURGBP
Price has been grinding lower within a broad bearish channel over much of this year. However, the channel has remained shallow and, of late, we have seen plenty of bullish divergence showing up on momentum studies, suggesting risks of a topside break. Price is currently testing the channel top and recent .8598 highs and with the market around d65% short, there is room for an upside move to develop further here. If we break above here, the next levels for bulls to target will be .8661 and .8723