LONDON - Sterling fell to a two-week low versus the euro on Tuesday as traders feared the Bank of England may keep interest rates unchanged amid concerns about the Omicron coronavirus variant.
Risk assets were under pressure after Moderna Chief Executive Stéphane Bancel told the Financial Times that existing COVID-19 vaccines are unlikely to be as effective against the newly detected variant as they have been previously.
"With the 16 December BoE rate decision drawing closer, a worsening of the virus situation globally and specifically in the UK may not only put upward pressure on EUR/GBP due to the pound’s higher sensitivity to risk sentiment but may also mean markets could increasingly price out a December rate hike," ING analysts told clients.
Against the euro, sterling slipped 0.3% at 0910 to 85.02 pence, after touching a two week low versus the single currency in earlier London trading. It rose 0.3% versus the weakening dollar to $1.3360, after touching a December 2020 low of $1.3278 on Friday.
The Omicron variant was first recorded in southern Africa last week, prompting countries to rush to tighten border controls and sending markets into a tailspin on Friday.
Investors worry that more COVID-19 restrictions would water down expectations for rate hikes in Britain.
The pound has risen around 5% versus the euro this year, finding some support on the expectations that the BoE could raise interest rates faster than the European Central Bank.
Markets are pricing in around 8 bps of an increase in interest rates by the Bank of England on Dec. 16. That has fallen from more than 12 bps at the start of last week.
(Reporting by Joice Alves, Editing by William Maclean) ((Joice.Alves@thomsonreuters.com, twitter @joiceal))