The pound sterling tumbled as markets feared tightening social restrictions in the UK would stymie efforts to recover the economy and prospects for rate hikes.
The pound sterling slumped to around 1.3200 against the US dollar in trading this Thursday (9/December), settling at the one-year record low it has held since the close of trading yesterday. Market participants are concerned that the tightening of social restrictions in the UK will stymie efforts to recover the economy and further erode prospects for a rate hike.
On Wednesday, UK PM Boris Johnson announced the implementation of a "Plan B" to fight the new wave of the coronavirus. The UK government's instructions for the public include wearing masks in public from Friday, working from home from Monday and presenting vaccine passports to enter certain crowds from Wednesday.
Most of these provisions are a recovery from social restrictions that were previously withdrawn by the government. A number of analysts believe the government's move could hit certain business sectors that are still in a critical situation. The British central bank (BoE) also has the potential to fail to raise interest rates this month due to increased economic uncertainty.
Matthew Fell of the Confederation of British Industry said: "The new restrictions are a major setback for businesses, especially those in hospitality and retail which are in a critical period, as well as others such as transport."
Mizuho's Neil Jones argued, "The pound is selling off as Plan B restrictions are likely to result in a pullback in the BoE rate hike expectations for December. (I) would expect Sterling to continue to weigh against the USD and other G10 (currencies). Seems like momentum further declines into the year-end."
Analysts now predict the BoE will choose to be "patient" in the BoE's policy meeting next week. The biggest chance of a BoE rate hike still lies in the first quarter of 2022.
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