The AUDGBP exchange rate slumped ahead of the weekend after the emergence of a new coronavirus strain in South Africa. The UK has said it has 3 confirmed cases and that will add to the recent surge of delta cases in Europe. Traders reacted by the selling the pound sterling, but Australia has recently opened its borders further and may have to reverse that decision.
The AUD v GBP traded under the 0.8350 level heading into the Monday session.
Omnicron variant arrives in UK and Australia
The Australian dollar versus the pound sterling sold off ahead of the weekend on fears of a new virus variant.
New cases were confirmed in the UK, but Australia also recorded its first cases. Two passengers arrived in Australia on Saturday night and are in isolation in the Special Health Accommodation, while both are fully vaccinated.
Australia has now shut its borders to nine southern African countries and states are moving to new rules for international arrivals.
WA Premier Mark McGowan said he would not hesitate to enforce new restrictions, adding:
“There is a great deal of uncertainty about the recently emerged Omicron variant so it is important Western Australia has strong protections in place for states which have relaxed their international borders. NSW no longer has a hotel quarantine system. It is a big risk and that is why we have had a very cautious approach about other states.”
The Australian dollar has been boosted by the recent reopening of international borders and state boundaries. Those could be walked back in the weeks ahead and the currency market will depend a lot on the aggressiveness of politicians, where Australia has been more heavy-handed than the UK recently.
Interest rate expectations will be another driver for AUD v GBP
The initial knee-jerk reaction in the AUD GBP was driven by fears that the virus will change the path of interest rates for the pound sterling.
Traders had been pricing in a December rate hike for the hike but that is likely to be unwound in the weeks ahead with the bank given another pass to ignore inflation.
The Reserve Bank of Australia was committed to a 2024 rate hike and traders also added bets that it would be sooner. Both exchange rates may swing in the days ahead as traders reposition on the latest virus path.
The Bank of England chief economist again stated the obvious at the weekend, that interest rates are set to rise, but traders were burned with the hype of November hike that did not materialize.
“In my view, the ground has now been prepared for policy action,” he said.
“However much we flag that any guidance on bank rate is conditional on how circumstances evolve, the danger exists that guidance will be interpreted as a commitment, and the necessary policy flexibility will be compromised.”
The Bank of England has been unhappy that traders assumed a November hike, but their comments reacted to the inflationary spike and led investors down that path.
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