The Fed's aggressive shift in tapering plans appears to be having a delayed positive impact on the currency with policy divergence front and center across the G10 FX. While the Fed's focus appears to have switched drastically to the inflation debate there isn’t much on the economic calendar to get too excited about. In terms of data, we anticipate a robust reading in November's durable goods orders this week, which should support the US's strong growth prospects. Markets will also keep an eye on the current discussion in Washington over Biden's spending package, as additional opposition to it might weigh on the dollar.
The Canadian dollar's recent underperformance against its G10 counterparts is exaggerated and unwarranted by any fundamental divergence. On the contrary, the Fed's hawkish shift will fuel speculation that the Bank of Canada (which has already ended QE) will begin hiking in 1Q22.
The Canadian dollar has a tendency to outperform throughout this time period. Naturally, the current risk climate makes a CAD rally difficult, but after the recent rally, some USD/CAD consolidation should be seen around Christmas - especially if oil remains anchored around US$70/bbl.
Despite the ECB being less dovish than predicted, policy divergence with the Fed was evident at last week's central bank meetings. The ECB will find it difficult to ignore the Omicron effect, which is already resulting in harsh lockdowns in several eurozone countries. This should provide a bearish underlying narrative for EUR/USD in 2022. The eurozone’s calendar is set to be rather quiet in the next couple of weeks. All in all, we expect EUR/USD to consolidate around the 1.1300 level into the new year.
The Bank of England's surprise rate hike last week provided temporary support to the pound. The rapid spread of the Omicron version in the UK might keep the GBP under pressure around Christmas, especially if the government decides to apply more restrictions. Markets are re-evaluating both the Brexit policy and the stability of the Johnson Cabinet following the resignation of Brexit top negotiator David Frost, which might weigh on GBP. Overall, look for the pound to remain weak over the holiday season.
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