After a choppy two sessions on Wednesday and Thursday in wake of monetary policy announcements from first the Fed and then the ECB, a sense of calm has returned to EUR/USD. The pair has been ebbing lower from monthly highs printed on Thursday at 1.1360 and currently trades in the 1.1310s, with traders likely eyeing a test of the 1.1300 level.
Whilst conditions over the last few days have been choppy, EUR/USD has largely stuck within 1.1230-1.1360ish ranges that had already been estabilished prior to the start of the week earlier on in the month of December. Amid a lack of any further key macro narrative alternating economic events or data releases in either the Eurozone or US between now and January, rangebound conditions will likely prevail into the year-end.
In terms of what that macro narrative actually is, strategists might surmise things like this; amid elevated inflationary pressures in both the US and Eurozone, the Fed and ECB are moving away from pandemic era emergency stimulus. The Fed has already begun its QE taper, which is set to accelerate from January and be swiftly followed up by as many as three rate hikes in 2022, whilst the ECB’s first major step towards monetary normalisation will come as the PEPP ends in March, though rate hikes are unlikely before 2023.
The consensus narrative about how that translates into FX markets has been that, amid comparatively higher US inflationary pressures, as well as a stronger labour market and economic recovery, the Fed’s more hawkish stance versus the ECB has been EUR/USD negative. Many expect this trend to continue into next year.
But narratives can quickly shift and market participants are keeping an eye on the rapid spread of the Omicron Covid-19 variant. Fed Chair Jerome Powell explicitly said on Wednesday that Fed monetary normalisation was not on autopilot and if the economy did drastically slow, the Fed could delay its plans. Some think the spread of Omicron could present such a risk. Infection rates are expected to surge in the US in the coming weeks/in Q1 2022 and may lift EUR/USD is Fed tightening plans are thrown off course.
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