LONDON (Reuters) -The British pound fell to a new 2021 low against the U.S. dollar on Wednesday as expectations that the Bank of England will raise interest rates next week waned amid reports tougher restrictions against COVID-19 were in the offing.
Britain could implement tougher COVID-19 measures, including advice to work from home, as early as Thursday in a bid to slow the spread of the emergent Omicron variant of the coronavirus, according to media reports.
Money markets are now assigning only a 46% probability of a 15 bps rate increase next week, down from 58% before the news and down from nearly 70% probability two weeks ago.
The Bank of England may hold off again next week on becoming the world's first big central bank to raise interest rates from their pandemic lows due to the spread of the Omicron strain.
"The imposition of these restrictions - which are, we think, only a relatively small tightening of limits - is likely enough to keep the BoE from hiking next week as they will prefer to wait until the February meeting," Scotiabank strategists said.
Against the dollar, the pound slumped 0.5% to its lowest levels since December 2020 at $1.3162. Versus the euro, the pound weakened 0.7% at 85.34 pence.
The U.S. Federal Reserve meets next week, with policymakers flagging in the run-up that an increase in the pace of stimulus tapering is likely, which would set up the possibility of earlier rate rises.
A U.S. Labor Department report on job openings due later on Wednesday should provide further evidence of a tightening labour market, potentially adding fodder for bets on earlier Fed tightening. [FRX/]
(Reporting by Saikat Chatterjee; Editing by Robert Birsel and Mark Heinrich)