As snags in the supply chain delay vaccine distribution worldwide, new variants of COVID-19 remain significant threats. Omicron, which was recently identified by South African scientists, is the most recent variant of concern. Believed to be more transmissible than Delta, this particular strain of the virus has been spreading rapidly across Europe, where cases have been rising due to the public’s lax compliance with health and safety regulations. Denmark and the UK in particular have seen a concerning spread, reporting 183 and 246 confirmed cases respectively as of December 5.
This news has staggered financial markets all over Europe. Currency exchanges specifically saw a marked increase in volatility when Omicron was first identified. But as more information on the strain circulates and fears subside, things look poised to settle down.
Here’s more on how Omicron is bound to affect the outlook of forex markets in the coming weeks.
At the beginning of December, the emergence of Omicron had forex markets the world over facing the highest volatility since March. The British pound (GBP) fell to 1.3218 against the US Dollar (USD), the lowest it had been since exactly a year prior. Meanwhile, it also dropped to 0.8541 against the Euro (EUR), the lowest since November 12.
With Europe currently flagged as the centre of the pandemic by the WHO, the EU’s currencies have felt the impact, as well. The Deutsche Bank’s currency volatility index (DBCVIX) crept up to the highest it’s been since February. The Swedish Riksbank hiked up its rate forecasts to 20bp by 2024. Meanwhile, EUR/USD went into free-fall, with the U.S. dollar reaching a 16-month high against the euro.
Impact on other markets
The impact of the Omicron variant ultimately caused a chain reaction in a variety of sectors, all of which circled back to affect Europe’s currency markets. For instance, the recovery in demand for oil took a hit, making it more difficult for the industry to meet rising “post-pandemic” oil demand. As we previously discussed in this article from Money Matters, these conditions are likely to further spike European gas prices — especially given the ongoing gas shortage.
Omicron fears have also reached the commodities market, resulting in rising food prices. The trade volatility charts from FXCM show that futures in everything from wheat and corn to copper have declined by as much as 3% between November 29 and December 6. Meanwhile, Europe’s stock markets have seen similar volatility; tech stocks dropped by 3.8% on December 2, with equities in nearly all sectors following into the red.
Easing fears belie positive outlook
Fortunately, governments worldwide are reacting to new COVID threats more quickly than before, and scientists are working to unlock the mysteries of Omicron with increased efficiency. Some experts also believe that economies are now experienced enough with these issues to weather the emergence of any new variant without major setbacks. For example, while the first wave of infections knocked 15% off Europe’s economic activity, the second only took away 0.7%. Consequently, increasing knowledge of Omicron means we can expect markets to settle down.
In fact, traces of this confidence are already manifesting in the market. Notably, the GBP bounced back above 1.33 against the USD on December 2. It’s also likely set for an additional boost as the British government pushes the administration of more booster shots, which medical professionals tentatively believe protect well against Omicron. Meanwhile, the Euro achieved the biggest three-day rising streak it’s seen since 2020.
Ultimately, it’s important to remember that the ongoing pandemic breeds some degree of economic uncertainty. But for now, experts advise a cautious but optimistic outlook, with short trades the best option for anyone currently in the market.