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It is worth noting that the pair is consolidating amid the tightening rhetoric of Fed Chairman Jerome Powell, who actually recently announced the early curtailment of QE. Yesterday, the head of the US regulator spoke in the Senate again and confirmed his intentions. Hawkish expectations in the market have significantly increased – experts now admit the first increase in the interest rate in June next year. In particular, this forecast was published by Danske Bank. According to currency strategists, the US regulator will raise the rate three times in 2022: in June, then in September, and finally at the last December meeting. A similar forecast was published by analysts of the conglomerate Goldman Sachs.
On Wednesday, Jerome Powell reiterated the points he had made the day before. He again stated that the regulator should abandon the "concept of temporary inflation". The Fed's head noted that given the recent macroeconomic trends, it's time to characterize the US inflation in a different way, removing the word "temporary" in the definition. That is, the regulator actually recognized that the current rate of price growth has been established for a long period of time. Commenting on inflation trends, Jerome Powell predicted a significant decline in inflation in the second half of next year. But at the same time, he voiced an important remark: "we cannot act in such a way as if we are 100 percent sure that this will happen in 2022." In other words, the Fed Chairman questioned his own forecast, assuming that inflation will continue to gain momentum next year.
The whole point of this verbal balancing act is that the Fed is ready to take concrete action, responding to current inflationary trends. In particular, the regulator is now ready to accelerate the pace of curtailing QE. Powell promised that he would raise this issue at the next Fed meeting, the results of which will be announced on December 15. According to preliminary estimates, the regulator will accelerate the pace of curtailing incentives from the current $ 15 billion to $20-30 billion.
It is obvious that the next step of the Central Bank will be to tighten the parameters of monetary policy. It is worth noting that the head of the American regulator is not in a hurry to talk about the fate of the interest rate at the moment. The relevant conclusions were made by the market independently. By and large, experts voiced hawkish forecasts even before Jerome Powell's speech. Many analysts warned that the Federal Reserve would be forced to react to the record increase in US inflation, which has been going on for several months. Therefore, the currency strategists of the largest banks are predicting Powell's thoughts even now, assuring their clients that the Central Bank will raise the rate next summer.
Despite such hawkish signals, the EUR/USD pair is actually marking time, trading in a 50-point range. The growth of uncertainty in connection with the new Omicron strain of coronavirus is holding back traders, not allowing them to show character. This applies to both bulls and bears of EUR/USD. Speaking in the Senate yesterday, Powell noted that the new modification of COVID-19 poses a threat both to economic activity and employment and to price stability, as it may increase the shortage of supplies and labor. Given this remark, the market "with a special predilection" tracks the news flow relative to Omicron.
At the moment, it is known that the cases of COVID-19 have sharply increased in South Africa after the appearance of a new strain, but the number of hospitalizations has not increased proportionally. Experts suggest that Omicron, against the background of increased contagiousness, causes mainly a mild course of the disease, does not require hospitalization, and is easily detected by existing tests. There is also a possibility that existing vaccinations will retain their effectiveness against this species.
Nevertheless, Omicron, which previously caused concern to the World Health Organization, is still being studied by specialists – both for higher contagiousness, for the course of the disease, and for "bypassing" immune protection. There is no final verdict yet, but the preliminary conclusions of individual experts have reduced the panic mood in the markets.
Therefore, we can consider two sides on the scale. On one hand, we have Jerome Powell, who has toughened up his rhetoric, and on the other, Omicron, which has not yet been fully studied. EUR/USD traders are at the crossroads and therefore move in a fairly narrow price range.
If we consider short-term trading, then it is currently best to take a wait-and-see position. The degree of uncertainty is too high. But if we talk about the medium-term time period, then it is possible to trade in the US dollar here. The "good old" divergence of the positions of the ECB and the Fed will continue to provide background support to the US currency, especially if tomorrow's Nonfarm data do not let dollar bulls down. The first downward target is the level of 1.1280 (Tenkan-sen line). The main support level is the "round" and psychologically important level of 1.1200.
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