Sterling falls 0.5% versus euro and dollar

By Joice Alves

LONDON (Reuters) -Sterling fell versus the euro and the dollar on Tuesday as traders feared the Bank of England might keep interest rates unchanged amid concerns about the Omicron coronavirus variant.

Omicron was first detected in southern Africa last week, prompting countries around the world to rush to tighten border controls and sending markets into a tailspin on Friday.

"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 0.5% at 1700 to 85.15 pence, after touching a two-week low versus the single currency. It fell 0.5% versus the U.S. dollar to $1.3247, after touching a December 2020 low of $1.3194.

The dollar strengthened in the afternoon, after Federal Reserve Chair Jerome Powell said the risk of inflation had increased and suggested retiring the term "transitory" for inflation, while worries about the new Omicron variant kept a bid in safe-haven currencies.

Investors worry that more COVID-19 restrictions would water down expectations for rate hikes in Britain.

The pound had 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 and Mark Heinrich)