FX Daily: Verdict is still out on Omicron

Powell is not complacent about Omicron; German CPI caught up with US
Philip Wee30 Nov 2021
    Photo credit: Unsplash Photo

    DXY hit a session high of 96.4 before returning to the day’s open at 96.2. The greenback tracked the US 10-year treasury yield which failed to close above 1.50% after an intra-day high of 1.564% from 1.473% last Friday. Dow recovered 0.7% to 35,136 but closed beneath its 100-day moving average at 35,160 and its pre-Thanksgiving close of 35,804. Investors keen to buy on dips cheered US President Joe Biden’s announcement that there would be no lockdowns or new travel restrictions in response to Omicron. However, the World Health Organization dampened risk appetite with its warning that the global risk from the Omicron Covid-19 variant was “very high”. 

    According to prepared remarks released yesterday, Fed Chair Jerome Powell intends to tell the Senate Banking Committee today that Omicron and the recent rise in infections pose a threat to the US economy and its dual mandate. Apart from discouraging people to return to work in person, Omicron could prolong supply-chain disruptions and keep inflation high for longer. Powell’s remarks negated the optimism from Atlanta Fed President Raphael Bostic who played down the risk from Omicron last Friday. Bostic was probably encouraged by the Atlanta Fed GDPNow forecast model which estimated US GDP to expand by an annualized 8.6% QoQ in 4Q. On the data front, Dallas Fed manufacturing activities slowed to 11.8 in November; consensus had expected a rise to 15.0 from 14.6 in September. Today, the US Conference Board’s consumer confidence index is expected to drop to 111.0 in November from 113.8 in October. 

    USD/JPY to trade between 113.30 and 114.10 before Powell’s testimony. USD/JPY found support at 113 but remained weak well below the year’s high of 115.43 last Wednesday. Nikkei 225 index fell 1.6% to 28,284 on Monday, below its 100-day moving average at 28,730. Japan joined Israel in barring all new foreign arrivals from 30 November.

    EUR is digesting last Friday’s spike to 1.1320 from 1.12. Today, Eurozone CPI inflation estimate is set to rise from 4.1% YoY in October and exceed the 4.5% YoY consensus for November. Yesterday, Germany’s CPI inflation harmonized for the EU spiked to 6.0% YoY in November from 4.6% in October, well above 5.5% consensus and in line with the Bundesbank’s expectations. ECB board member Isabel Schnabel reckoned that inflation might peak in November and trend back to 2% in 2022, and hence, no urgency for the ECB hike rates. The German Economy Ministry was less confident and indicated in mid-November that inflation was only expected to ease at the start of 2022. Like it or not, ECB needs to recognize that Germany’s inflation has closed in with the US.

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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