Foreign exchange rates and Omicron

10 December 2021

As we head towards the end of 2021, just as we all thought we would be heading into a New Year with Covid under control, boom, along comes the Omicron and almost overnight we had countries closing their borders and UK reactivating the red lists. All this over a variant that so far has made no one seriously ill, is this an overreaction across the globe, or do they know something we don’t?

With Christmas just around the corner, most of us just want to be able to enjoy this season without worrying about further restrictions that could affect everything from shopping to international travel.

The Bank of England announcement that rates would be held at 0.1% sent quite a shock across the markets, and saw Sterling lose ground quite considerably. Was this a real shock or just a pricing correction based on the fact that markets had already priced in a rate hike, so when this did not materialise, they were left with no choice but to make the adjustment.

The Bank of England Governor Andrew Bailey has made every effort to avoid hinting about the timing of the next interest rate mover. He told the Sunday Times that he never said there would be a rate hike in November. He then told the House of Lords that he was inclined to scrap forward guidance. Investors were left none the wiser and the rate outlook became cloudier still following the news of the new covid variant!

Meanwhile, The Bank of England Chief Economist, Huw Pill, has declined to indicate whether an interest rate move would happen in December or early next year. With inflation at a 10 year high of 4.2%, it is looking to remain persistently high for the foreseeable future, an Interest rate hike seems to be on the horizon within the next few months. With no meeting being held in January, if rates are not hiked this month, it will be February 2022 at the earliest.

Meanwhile across the pond, the annual inflation rate in the US surged to 6.2% in October of 2021, the highest since November of 1990 and above forecasts of 5.8%. US interest rates remain at 0.25%. US Fed officials have signalled a possibility of a rate rise in 2022.

The EU inflation rate also moved considerably to 2.43%, up from the previous year of 0.68%. The European Central Bank will be one of the last major central banks to raise interest rates after the COVID-19 pandemic, according a Reuters poll of economists, who still say the risk is a rate rise comes sooner than their current prediction of 2024. Interest rates remain at 0.0%, while deposits remain at -0.5%.

While the ECB has said the recent inflation surge will be transitory and has clearly indicated no policy tightening until it averages around its 2% target, financial markets are pricing in a hike later next year.

So what does this mean for the currency markets?  Throughout 2021, we have seen Sterling move 10 cents against both the USD and the EUR. GBP/EUR has moved from €1.0920 to €1.1931, and GBP/USD has moved from $1.3227 to $1.4226. For a business importing $1m over the last year, Sterling has moved £53,090, a massive swing which can have a huge knock-on effect if foreign exchange is not managed effectively.

As we move into 2022, the uncertainty in the markets continues to rear its ugly head, putting more pressure on business to get their timings or policies correct.  The multi bank views on the markets are as follows;

GBP | USD – High $1.53, Low $1.23

For a business importing $1m p/a, a difference of £159,414

GBP | EUR - High €1.33, Low €1.08

For a business exporting €1m p/a, a difference of £174,046

Whilst the ranges are huge between the highs and the lows, and are only forecasts, the point here is banks cannot agree of where Sterling may or may not be throughout the year, but the risk to businesses continues. Managing your FX is a key factor, and if there is one thing that businesses do not want at the moment, is any more uncertainty, especially as far as costs are concerned.  Locking in costs, securing margin and profits is one area that business can do very easily. Playing the foreign exchange markets is nothing more than a gamble, and more often or not results in losing. Why take the risk when you can lock rates in and secure your profits as a business.

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