This is a potentially very volatile week for the EURUSD pair as both US and European policy come into key focus under the cloud of Omicron uncertainty. Both the US and Europe have seen rising case numbers.
The recent surge in Europe has tailed off, but both central banks will be looking at the potential Omicron surge coming as the UK prepares itself for an ‘Omicron tidal wave’. It is this parabolic surge in South Africa cases that is going to worry both countries as the best guess at the moment is that even double vaccinated are vulnerable to this variant.
Inflationary views diverge
The US has seen inflation close to 7% last week. The Fed has also dropped the ‘transitory’ inflation label. Europe’s headline inflation is at 4.9%, but the core reading is a little over 2%. Now, most of the inflation has been driven by higher energy prices and consumers shifting their demand from services to goods as services closed due to Covid-19 restrictions. Christine Lagarde is convinced that inflation is transitory following the RBA and the BoE’s example. However, expect that narrative to be tested as her deputy De Guindos is taking a Moree concerned view on inflation that it will ‘not go down as quickly and as much as it has been projected to.
The trade would be if we get a hawkish Fed concerned about inflation and a dovish ECB happy to sit and wait it out. This would open up a strong EURUSD bias and is one outcome to watch for. One nuance to this outlook is that from around Dec 25 – Dec 31 we often see strong USD weakness, so that could be a decent rally to sell if the central bank divergence takes place.