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Fed’s Powell + Omicron rock the market

USD - US Dollar

G7 FX volatility is on its highs for the year. Over the last week news of the Omicron variant has inserted a new and unsized risk premium into global asset markets. Yesterday, investors read a clean set of hawkish headlines from Fed Chair Powell, including remarks that it was time to retire inflation's description as transitory and that it may be appropriate to conclude tapering a few months earlier. With the dollar already close to the highs of the year on the Fed normalization story, the current environment certainly looks more mixed.

US data should continue to show strong numbers over the coming weeks (ISM and ADP today) which will foster expectations that the Fed could turn more hawkish at the December 16th FOMC meeting (in spite of Omicron). That should mean that any dips should prove shallow. This new Fed hawkishness muddies our view that the dollar could correct lower into year-end.

CAD - Canadian Dollar

Month end flows dominated the loonie yesterday, which saw USD/CAD hit a high of 1.2838, before dropping almost 100 points. Powell’s comments likely helped to the USD strengthen again the CAD yesterday with suggestions for further CAD weakness today. The focus remains on the Omicron variant and market sentiment will be defined by how the situation evolves. Manufacturing PMI will be released today, ahead of what will be an important OPEC+ meeting tomorrow. Expect some significant volatility in the days ahead.

EUR - Euro

EUR/USD volatility levels have spiked with competing themes - Fed policy and its concerns on inflation and the new covid strain which continues to drive uncertainty in the market. Both themes coupled with thinning liquidity conditions point to bumpy conditions in FX markets.

Yesterday EUR/USD stalled at 1.1380 right before Powell's comments hit the newswires. Powell testifies again today – but his remarks yesterday sounded like a deliberate policy shift and it would seem unlikely that he would backtrack on them at today's hearing. Similar remarks today will help cement 1.1380 as the top of the range - meaning 1.1180-1.1380 could be the range for coming weeks. In Europe, the focus today is on the final release of November manufacturing PMI indices. These have actually held up quite well despite renewed lockdowns.

GBP - British Pound

Though today’s BoE forum may not be the right venue to discuss monetary policy, BoE Governor Bailey may feel some pressure based on yesterday’ comments by Powell to discuss inflation concerns and rate hikes. Having moved to price out a December 16th BoE rate hike, investors may start to put a 15bp hike back into UK money market rates. Look for the GBP to rebound in the short term on expectations of near tightening cycle.

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