EUR/USD Up On Fed Expectations Adjustment

  • EURUSD
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Omicron Fears

The week started in better mood as sentiment seemed to normalize after Friday's intense risk-off mood, but today we see another nosedive, after Moderna's CEO Stéphane Bancel said "I think it's going to be a material drop" in regards to vaccine efficacy against the Omicron variant, in an interview with the Financial Times. [1]

Fed Expectations

Fear around the Omicron variant has casted doubt over the heightened market expectations for a faster monetary tightening from the Fed, amidst a recent string of increasingly hawkish commentary from Fed officials. CME's FedWatch Tool for instance, yesterday implied first rate hike in June 2022, but now places it in July 2022 - with 42.0% probability (at the time of writing). [2]

This repricing in expectations around the Fed's monetary policy, has not allowed the US Dollar to take advantage of its safe-haven status during this risk aversion period and has given EUR/USD the chance to benefit – despite continuing dovish rhetoric from the European Central Bank (ECB).

Central Bank Commentary

The most recent remarks came from ECB's Vice-President Luis de Guindos in an interview with Les Echos, published today, in which he says that "…monetary policy must remain accommodative after the PEPP has ended". [3]

Fed Chair Powell testifies today in the US Senate and his prepared remarks that which released earlier, he sees high uncertainty due to the new Covid variant, noting that "The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation". [4]

As we also wrote in yesterday's analysis we will be closely watching Fed speakers this week, due to the fast-approaching blackout period ahead of the mid-December policy meeting.

Trade the News: View our Economic Calendar

EUR/USD

The common currency managed to defend its EMA100 during Monday's slide and keeps 1.1374-9 in its crosshairs, in-line with Monday's analysis, but we are still cautious about broader recovery towards mid-1.1400 and the descending trend-line form this month's highs.

Despite fresh buying interest, we remain unconvinced as to whether risk aversion can carry the pair much higher. Risk of a downside breach of the EMA100 (1.1270-59) does not go away, but fresh 2021 lows (1.1184) have a high degree of difficulty at this stage.


Past Performance: Past Performance is not an indicator of future results.

Apart from Mr Powell's speech there are more Fed-speakers expected today, while preliminary Eurozone Inflation figures are due at 10:00 GMT.

Given the uncertainty around the new Omicron variant, sentiment is the main driver of the moves caution is needed , as risk is increased.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 30 Nov 2021 https://www.ft.com/content/27def1b9-b9c8-47a5-8e06-72e432e0838f

2

Retrieved 30 Nov 2021 https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html#

3

Retrieved 30 Nov 2021 https://www.ecb.europa.eu/press/inter/date/2021/html/ecb.in211130~887737ac79.en.html

4

Retrieved 27 Jan 2022 https://www.federalreserve.gov/newsevents/testimony/powell20211130a.htm

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