Sterling Decline As Boost From New COVID Rules In China Fade

Sterling Decline As Boost From New COVID Rules In China Fade

December 4, 2022 0 By Wiley McDermott

The strict zero COVID policy that China had adopted had given rise to many concerns in different markets.

There had been growth concerns, prices of oil and gas as well as other commodities had also suffered and the currency market had also experienced disturbance.

However, protests in the country saw the Chinese government introduce new rules and this has had a positive impact on different markets.

The impact

On Monday, the British pound had gotten a boost due to investor enthusiasm as China announced that it would be loosening some of the COVID-related restrictions.

Unfortunately, the boost did not last for long and the as the initial jolt faded, the currency was still left below the high of five months against the US dollar.

As far as the US dollar itself is concerned, the currency had started Monday on the back foot because China gearing up to announce some easing in its restrictions on the activity as part of its COVID measures.

Investors considered this as an indication of a shift in the tough zero-COVID policy that the Chinese government has implemented.

The risk rally had seen Sterling climb to a high in the session of $1.2345, but by late morning, this rally had lost its drive.

London trading saw the British pound drop by 0.3% against the US dollar to $1.2259, while losses against the euro were 0.4%, which brought the currency to 86.13 pence.

Sterling’s movements

In November, there had been a 0.52% increase in the value of the British pound against the US dollar, which made it its best performance in a month since 2020.

However, it is unlikely that the currency would be able to make more headway against the greenback because the political landscape in Britain has become tricky and the economic picture also appears to be gloomy.

Currency strategists said that where the sterling’s gains in the previous month are concerned, it could turn out to be too much a little too quickly.

The dollar

As far as the weakness of the US dollar is concerned, it is primarily due to expectations that the interest rate hikes from the US Federal Reserve this month would only be by 50 basis points.

The last four meetings have seen the US central bank increase its interest rate by 75 basis points each. But, the Fed might find it harder to justify slowing down in terms of monetary policy tightening.

This is due to the fact that data released on Friday showed that more jobs had been created in the US economy than expected in the previous month. Meanwhile, inflation continues to be around 8%.

UK data

The UK data, on the other hand, showed that there had been a decline in the services sector in Britain for the second month in a row in November.

This is because demand is under pressure due to uncertainty in the economic outlook and the high cost of living.

The Commodity Futures Trading Commission (CFTC) also released weekly data showing that there is still a bearish stance towards the British pound from money managers.

This means that they are generally negative where the sterling is concerned, but this net short position has reduced by 50% from what it had been earlier this year.

It indicates that there may be some big rallies, especially with the Bank of England scheduled for a meeting next week.