The new strain

This week’s update is focused on the only headline any news outlet is talking about: the Omicron variant of Covid. Discovered in South Africa, this mutation appears to have a much higher rate of infection than the Delta and Alpha variants, but the severity of symptoms isn’t known at this time. Suffice to say, the announcement was met with the immediate travel bans and tourist restrictions one might expect, no doubt aimed at containing the variant until more hospitalisation and mortality rate data is gathered.

The impact of the new variant and associated restrictions mimic that of the Delta variant announcement and might prove to be as transitory. Many countries were moving towards lockdowns anyway, which is going to have a negative effect on demand; it's unclear how the additional restrictions for Omicron will do much more damage. We'd suggest taking any further prognostication with a grain of salt; there simply isn’t enough evidence one way or another to forecast Omicron’s economic impact.

Bottom line: Setting aside the direct impacts of the new strain, one emerging line of argument we found compelling is the potential assent of the Euro. In the near term at least, US and UK rate expectations have declined with the price of Crude oil—wrongly, in our view—which starts to close the gap between UK/US and EU policy settings. The Euro trade-weighted index is sitting just above 15-month lows and has the potential to bleed some strength away from the better-performing Pound. In the long term, the decline in supply-side inflation will likely reduce the cost of doing business and release demand growth in those economies that have been most strongly impacted (significant net-energy importers like the UK). That’s to say, we wouldn’t expect Euro strength to persist, but it might rebalance the EUR/GBP dynamic in the short term.

The week ahead


GBP/USD fell 0.75% last week as risk-off sentiment swept markets amid fears surrounding the Omicron Coronavirus variant. In response to the variant, the UK Government announced new restrictions to come into force tomorrow. Wearing a face covering in shops and on public transport will be compulsory while travellers re-entering the UK will be required to take a PCR test and self-isolate until they receive a negative result. G7 health ministers are expected to meet today to discuss the developments of the variant. Elsewhere, Bank of England Chief Economist Huw Pill provided more colour on his interest rate stance on Friday. He indicated that the conditions needed for a rate rise have been met, citing a tight labour market. There’s little data to move Cable between now and the next BoE meeting on the 16th of December, with the pair largely at the hands of US Dollar sentiment and Omicron developments.

  • The British Retail Consortium Shop Price Index y/y will be published this Wednesday. The latest reading stands at -0.40% for October.
  • The Nationwide House Price Index m/m is forecast at 0.40% for November versus 0.70% for October.
  • BoE Governor Andrew Bailey will speak this Wednesday at the Institute and Faculty of Actuaries.
  • The latest round of meetings between the Organization of the Petroleum Exporting Countries and the Joint Ministerial Monitoring Committee will take place on Thursday.



EUR/USD pulled back in early trade this morning after reaching overbought territory following its 1.00% rally in the second half of last week. Germany’s new coalition government laid out their plans for the most ‘socially progressive government in a decade’ last week, and the new ‘traffic-light’ government is expected to bring greater fiscal spending. However, the liberal Free Democrats Party (FDP), a party with a more hawkish bias, could help hold the reigns as it's keen to avoid tax rises. The Euro-Stoxx 600 bounced 0.90% in early trade today as markets digest the latest Omicron Coronavirus concerns. Eurozone inflation data is due on Tuesday but is unlikely to drive any tangible move in the Euro as Covid-19 dominates headlines.

  • European Central Bank President Christine Lagarde is due to speak today at 5:15PM and this Friday at 8:30AM.
  • Eurozone flash Consumer Price Index and Core CPI y/y figures are due on Tuesday. Current forecasts for November project 4.40% and 2.30%, respectively, following October readings of 4.10% and 2.00%.
  • German Retail Sales m/m are predicted to come in at 0.80% for October after printing at -2.50% in September.
  • Spanish Unemployment Change looks set to rise in November with a 5.3K reading expected to follow October's 0.7K decline.



The US Dollar Index is unchanged from the start of last week after some choppy price action amid Jerome Powell’s renomination as Federal Reserve Chairman and Omicron Coronavirus developments. Canada’s first case of the new Omicron Covid-19 variant was discovered yesterday, while US Chief Medical adviser Anthony Fauci warned of a ‘fifth wave’ with cases rising and vaccination rates slowing. The S&P 500 closed 2.30% lower on Friday amid a broader market sell-off; US markets did close earlier, which may have exacerbated these moves as liquidity tightened. Employment data due at the end of the week could lend more support to the Federal Reserve’s recent decision to increase the pace of its taper from January.

  • Fed Chairman Jerome Powell is due to speak throughout the week, most notably testifying on the CARES Act before the House Financial Services Committee on Wednesday.
  • ADP Non-Farm Employment Change will be released on Wednesday at 1:15PM, with a November reading of 525K expected to follow 571K previously.
  • The latest ISM Manufacturing Purchasing Managers’ Index will be published on Wednesday at 3:00PM with a forecast of 59.9 for November versus 60.8 in October. The ISM Services PMI will be released on Friday with expectations of 69.4, previously 66.7.
  • Non-Farm Payrolls are due on Friday, closing out the week. A 528K reading is forecast for November following October's 531K. The headline Unemployment Rate looks set to fall to 4.5% from last month’s 4.6%.


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