Pound jumps as Omicron risk dismissed

It has been a very good week for the British pound, which is up 1.29%. So good, in fact, that this will likely mark the pound’s best week of 2021. On Thursday, GBP/USD punched above the 1.34 line for the first time in a month.

The pound’s newfound strength is a result of stronger risk appetite. When Omicron first appeared on the scene several weeks ago, there were dire predictions about the damage another wave of Covid would cause to the global economy. Omicron has spread very quickly across Europe and the US, but investors remain optimistic that although Omicron is much more contagious than Delta, the symptoms are milder, according to some medical reports. With risk sentiment on the rise this week, we are seeing a movement away from the safe-haven US dollar, and the pound has gained ground.

Markets dismiss Omicron, at their peril?

Despite the optimism displayed by the markets, it is far from clear that Omicron is nothing more than a tempest in a teapot. More research is needed to determine if Omicron is indeed less severe than Delta. Even if this is the case, Omicron could cause severe symptoms in unvaccinated people and put a huge strain on hospital resources. As well, it would be folly to ignore the non-developed nations, which are a majority of the world. For many of these countries, the only available vaccine is Sinovac, which may not be effective against Omicron. The optimism we are seeing in the equity markets will have been badly misplaced if Omicron proves to be more deadly than the markets want to believe.

In the UK, there was some light in the pre-Christmas gloom after Prime Minister Boris Johnson announced that it would not introduce new restrictions before Christmas. Still, Johnson warned that there could be further measures after the holiday. Johnson is under intense criticism after new reports that he and government ministers ignored Covid health restrictions against social gatherings. Johnson’s claim that these gatherings were working meetings have been met with scorn and there is even talk that the Prime Minister could be replaced shortly.

GBP/USD technical analysis

• GBP/USD has support at 1.3349 and 1.3261.

• There is resistance at 1.3462 and 1.3550.