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New covid fear leads to rethinking in markets

Risks of another covid hit to economic activity skew expectations for rate hikes next year of the world’s major central banks, a potential setback for the dollar and other currencies where betting has been the most aggressive.

Money markets no longer fully price in a 25 basis point rate hike with the Federal Reserve by June 2022, nor are they positioned for a full 10-bp increase from the European Central Bank by the end of 2022, as they were just a few days ago.

And the odds of the Bank of England raising interest rates next month are around 53%, up from 75% on Thursday. Those shifts came after the detection of a new coronavirus variant in South Africa led to stricter border controls by several governments, while scientists tried to determine whether the mutation was vaccine resistant.

“While the central bank’s commentary focused on upside risks to inflation, this (new covid variant) highlights that there are significant downside risks and we are in a significant phase of uncertainty for the economy,” said Chris Scicluna, head of economic research at Daiwa.