Bailey Warns Of Residual Risks

Expectations that the Bank of England will hike in interest rates before the year end seemed to take another knock yesterday. Speaking at a business conference in London yesterday, the BOE governor warned over the continued economic risks around COVID. Bailey kicked off the speech by praising the recovery so far, saying: "Direct economic effects of COVID have attenuated a lot since the fall in GDP in the second quarter of last year, when we went off a cliff.” However, the BOE chief went on to warn that “there are still impacts that we are feeling from COVID quite strongly." Bailey went on to add that "Even now, services are recovering but we have still got quite a long way to go. That has put quite a strain on supply chains around the world."

Awaiting Further Omicron Details

While the BOE stopped short of commenting on the new variant, the uncertainty around the new variant has made itself very clear in price action over the last week. UK asset prices, along with the broader risk complex, tanked in response to news of the variant. However, we are seeing some recovery activity this week. The real catalyst, however, is likely to be once we start to get some better details on the severity of the new strain.

Falling Rate Hike Expectations

In the UK, government health officials have warned that they are likely to have a proper idea of the seriousness of Omicron over the next few days to few weeks. If they announce that the virus is not as concerning as first thought, this will likely see a sharp rebound in risk sentiment, putting a December BOE rate hike firmly back on the table. However, if the new strain is deemed to be a bigger threat than previous strains, this will likely see the BOE relegated to the side lines in December while it waits to see what course the government takes and what impact it has on the economy. Currently, pricing for a December hike is sitting at around two-thirds, down from around three-quarters before Omicron was announced. So, there is still a decent level of expectation that the BOE will hike.

Technical Views

GBPUSD

GBPUSD continues to languish at the bottom of the bear channel following the recent break below the 1.3349 level. While the focus is still on further downside for now, the latest leg of the decline can be seen as a falling wedge pattern, flagging potential upside risks. This view is further supported by bullish divergence in momentum studies. Should we see an upside break, the 1.3349, 1.3461 and 1.3570 levels are the key upside markers to note.