The EUR/USD pair was trading within the 150-point range yesterday, demonstrating increased volatility. The low of the day was consolidated at the level of 1.1235, while the high was at 1.1383. Such intraday flights are observed infrequently.
Traders of this pair found themselves in an interesting position. On the one hand, there is a new strain of coronavirus Omicron, which scares with its increased contagiousness, and on the other hand, there is the Fed chairman Jerome Powell, who surprised with his "hawkish" attitude. It is not easy to solve such a riddle, given the fact that the same head of the Federal Reserve was concerned about the spread of a new "modification" of the COVID-19. There is no doubt – if it were not for Omicron, the EUR/USD pair would already be in the area of the 10th figure, playing off the hawkish rhetoric of the head of the American regulator. However, the market and the history do not tolerate the subjunctive mood.
Therefore, the fact remains that yesterday's round was left to the buyers of EUR/USD, who were able to return the pair to the area of 1.13. The fear of Omicron overshadowed all other fundamental factors: the emotionally colored "apocalyptic scenario" of a repeat of 2020 prevailed.
But let's start with Powell. He really surprised. As part of yesterday's speech in the Senate, the Fed's head voiced the most important phrase that many experts and traders were waiting for. He said that given the recent trends, it's time to characterize US inflation in a different way, removing the word "temporary" in the definition. The Fed chairman admitted that inflationary growth in the United States is not temporary. This has been discussed for several months by many economists and currency strategists of the largest banks, as well as representatives of the "hawkish wing" of the Fed.
The words voiced by Powell are an important circumstance of a fundamental nature. He unblocked the path to tightening the parameters of monetary policy. Moreover, the first step towards raising the rate will be taken already at the December meeting. We are talking about accelerating the pace of curtailing the incentive program. Recognizing the fact that inflation has ceased to be "temporary," Powell said that the curtailment of QE would be advisable to complete a few months earlier. He promised that he would raise this issue at the next Fed meeting, which will be held on December 14-15.
This announcement "fits" into a hawkish scenario, which was voiced, in particular, by Goldman Sachs experts. They predicted the early completion of the stimulus program and a double rate hike in 2022 – in July and at one of the last meetings of next year. Initially, the Fed planned to complete QE by July next year, but, apparently, the program will be finally curtailed in early spring. It is likely that by June or July, the regulator will "mature" for the first round of interest rate increases. For now, we can talk about it not only in the context of hypothetical assumptions of the expert community. Yesterday's statement by Jerome Powell allows us to talk about the implementation of the hawkish scenario in a practical context.
Why did the EUR/USD bears lose the initiative amid such circumstances? In my opinion, Omicron is to blame for everything. The new strain of coronavirus has not yet been fully studied, while numerous assumptions/guesses/observations frighten traders of the currency market. Scientists will only know in three to four weeks to what extent Omicron can bypass the immunity formed by vaccines or antibodies, and whether it leads to worse clinical symptoms. According to preliminary (not scientifically confirmed) data, Omicron is even more contagious than the Delta strain. Most likely, this will lead to a sharp spike in infection, which can put pressure on the medical system of many countries of the world. On the other hand, unofficial reports of doctors who treated patients with the Omicron strain in South Africa say that a new type of Covid causes mild symptoms – dry cough, fever, fatigue. There is no information about the effectiveness of vaccines in the context of Omicron yet. At the same time, the head of Pfizer has already stated that the Comirnaty vaccine will provide protection against the severe course of the disease when patients require hospitalization or intensive care. In addition, he stated that the company's specialists will modernize the drug within 2-3 months, taking into account the properties of Omicron.
Therefore, the information hype around the new COVID-19 strain overshadowed the speech of Fed Chairman Jerome Powell, who actually announced the tightening of monetary policy parameters. The USD bulls lost the round but did not lose the fight. After all, it should be noted that the chairman of the Federal Reserve laid the foundation for further strengthening of the US currency – and even more so paired with the euro, which is under the background pressure of the "dovish" position of the European Central Bank. As soon as the panic about Omicron comes to naught, which might happen next week, the "classic" fundamental factors will be included in the work, which will be on the side of the US dollar and especially paired with the euro.
Therefore, it is currently best to take a wait-and-see position for the EUR/USD pair or open short positions, with downward targets of 1.1280 (the Tenkan-sen line on D1) and 1.1186 (this year's low). In my opinion, the market underestimated the importance of yesterday's event. After all, Powell joined the hawkish camp of the Fed by toughening his rhetoric. There is no doubt that having implemented the first stage (early curtailment of QE), the regulator will proceed to the second stage, which involves a gradual but consistent increase in the interest rate.
