Sterling recovers, investors focus on government Omicron response

By Elizabeth Howcroft

LONDON (Reuters) -A rebound in global risk appetite pushed the British pound up against the dollar and euro on Tuesday, after Britain announced support for businesses hit by the latest wave of COVID-19 infections amid fears of new restrictions on activity.

A combination of the rapid spread of the Omicron coronavirus variant, possible lockdowns in Europe, as well as a blow to U.S. President Joe Biden's fiscal spending plans caused a "risk-off" move in currency markets on Monday, with the pound dropping to as low as $1.3175.

As the move reversed on Tuesday, however, the pound recovered in line with other risk-sensitive currencies. It was up 0.3% at $1.325 as of 1636 GMT, having erased its gains from when it jumped to $1.33755 following the Bank of England raising rates last week.

It was up around 0.4% at 85.045 pence against the euro.

Prime Minister Boris Johnson said on Monday he would take "further action" to limit the spread of the Omicron variant if needed, describing the situation as "extremely difficult".

British media said ministers had pushed back against the prospect of new restrictions before Christmas.

"The fast spread of the Omicron variant in the UK may keep some pressure on GBP around Christmas, in particular as the government may opt to impose some new restrictions," wrote ING FX strategists in a client note.

ING said that investors likely still have short positions on the pound, which could help limit its losses, but "risks still appear moderately skewed to the downside".

Finance minister Rishi Sunak announced 1 billion pounds ($1.3 billion) of support for businesses hit hardest by the wave of COVID-19 cases.

British retail sales growth fell sharply in the first half of December, according to the Confederation of British Industry.

A business confidence survey showed British businesses began to feel the impact of the Omicron variant this month.

"Sunak’s decision to provide financial support for struggling businesses does bring some optimism, although traders will be aware that this is likely to be a precursor to further restrictions," Joshua Mahony, senior market analyst at IG said in a note to clients.

Data showed British public borrowing nearly halved in the first eight months of the 2021/22 financial year compared with a year earlier when finance minister Rishi Sunak was deep in his emergency pandemic spending programme, official statistics showed.

(Reporting by Elizabeth Howcroft, editing by David Evans and Bernadette Baum)