U.S. dollar boosts pound, euro as traders weigh on Omicron variant

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U.S. dollar boosts pound, euro as traders weigh on Omicron variant

LONDON, January 6, Reuters -- The pound was a bit lower against the dollar and euro, hurt by the dollar strength, while investors weighed up the extent to which easing fears around the Omicron variant of COVID-19 would result in economic gains.

The British pound, Australian dollar and Canadian dollar were down on the day against the U.S. dollar, which was boosted late on Wednesday and overnight by the minutes of the Fed's December meeting being more hawkish than expected.

They showed that the Fed may have to raise rates sooner than anticipated due to a very tight job market and unabated inflation.

Services PMI data came in slightly higher than the preliminary flash reading, but shows that Britain's services sector suffered its biggest loss of momentum last month, as the country was last in lock-down, with the index falling to a ten-month low due to the spread of the Omicron variant of coronaviruses hammered hospitality and travel.

The pound was down 0.1% against the stronger dollar at $1.35375 at the time of 1319 GMT.

It was down 0.2% against the euro, at 83.575 pence per euro.

The pound had a good start to the year, having weakened against the dollar on Tuesday and Wednesday and risen from the one-year low of $1.31615 seen in December.

After a surprise hike in December, investors expect the Bank of England to raise interest rates as early as next month.

The strengthening is due to investors seeing the Omicron variant of COVID 19 as less disruptive to the economy than originally feared, according to analysts.

Prime Minister Boris Johnson has resisted imposing stricter lockdown measures in England, as Britain has seen record prevalence of the virus, with one in 15 people in England infected.

Johnson has relaxed the rules for travelling to England, removing the need for a pre-departure test.

Jeremy Stretch, head of G 10 FX strategy at CIBC, said that the PMI data being revised upwards from December estimate was a sign of improvement and that euro-sterling could fall below the 83 level.

The flash estimate that I think is relevant because it shows that the service sector is trying to ride out the Omicron variant in the same way that the politicians are trying to do. In a client note, Geoff Yu, FX and macro strategist at BNY Mellon, wrote that most of the gains for sterling versus the euro are already priced in.

With a highly unlikely growth surge driven by productivity or real income gains, all the risks to the UK are now to the downside, and the country is still struggling to make the most of its lack of restrictions, he wrote.