GBP/USD crashes out of the sky on hawkish Fed Powell, covid Omricon contagion risks

Sterling fell to a one-year low versus the US dollar Tuesday due to the sentiment of divergence between the Federal Reserve and the Bank of England following hawkish comments from Fed's chairman Jerome Powell. At the time of writing, GBP/USD is trading at 1.3250 and down around 0.5% on the day so far, falling from a high of 1.3370 and crash landing at 1.3194.

Fed's Powell, who was making a testimony before the Senate, said that it is time to retire the term "transitory" for inflation. Additionally, he considers it appropriate to talk about speeding up tapering in the upcoming December meeting. On that, the US dollar took off and the euro plunged, dragging the pound along for the ride as investors weigh the risks of the contagion of the Omicron coronavirus variant and the concerns that there is no effective vaccine solution, yet. 

Risk assets were under pressure after Moderna Chief Executive Stéphane Bancel told the Financial Times that existing COVID-19 vaccines are unlikely to be as effective against the newly detected variant as they have been previously. On the other hand, there are mixed messages with the CEO of BioNTech saying the current generation of Covid-19 vaccines will probably still protect against severe disease in people infected by the omicron variant. However, drugmaker Regeneron Pharmaceuticals Inc said on Tuesday its COVID-19 antibody treatment could be less effective against Omicron.

Nevertheless, the uncertainty has rocked the socks off risk assets. The markets have also got what they were waiting for in Powell's testimony today, firming the belief that the Fed may still have to hike sooner than first expected despite the threat of the virus. However, it is yet to be seen as to what the Bank of England's bias will now be. 

BoE in focus

Inflation has moved sharply higher in the UK, but the BoE has remained firmly with the opinion that inflation will be transitory whereby the three components, food, energy, and autos price has been affected by the supply chain blockages and re-opening of the economy.

Wage data is also mixed, analysts at TD Securities argued. ''Headline wages are distorted by furlough and compositional effects, but underlying pay growth is still rising. Flash October PAYE pay data shows the first drop in median pay since the early days of COVID, as the furlough scheme ended.''

''The BoE's Dec meeting remains finely balanced. A single hike before March is all but certain, but Omicron may hold the MPC off until February.''