Yesterday, MPC member Ben Broadbent (more of a dove than Saunders) declined to say whether a rate hike will be needed and acknowledged the Omicron-variant impact will take time to be assessed. While the Federal Reserve sent some hawkish signals and still sounded quite focused on spiking inflation, the Bank of England saw even some of its more hawkish voices like Michael Saunders take a more cautious tone. We’ve seen a stark divergence in how central bank officials have addressed the Omicron risk in the UK and US. We could see EUR/USD re-test 1.1200 this week.

With the eurozone growth outlook already partly compromised by restrictions in Germany and other eurozone countries, and the European Central Bank sticking to a broadly dovish tone, the euro may be facing more pressure regardless of Omicron-related sentiment. It appears that the euro’s role as a funding currency is curbing the EUR/USD upside in the current market environment, as investors jump back into risk-on bets. Investors will also keep an eye on developments on the US-Russia diplomatic tensions, as Biden is reportedly considering sanctions on Russian banks if Russia invades Ukraine. The dollar may simply remain the tip of the balance between currently underperforming low-yielders (JPY, CHF) and recovering pro-cyclicals, with sentiment on the Omicron variant still set to drive most market moves. Today, we may get a bit of the same as yesterday: there are no major data releases in the US and no Fed speakers given the pre-FOMC blackout period. With the Omicron risk looming, we are wary about making any strong calls on pro-cyclical currencies, but the latest developments in China are most surely a positive for the currencies which have a high beta to the region. More crucially, the Politburo signalled that some real estate curbs will be eased, just as Evergrande approaches a long-awaited debt restructuring.

The People’s Bank of China cut its reserve requirement ratio by 50bp yesterday, continuing to buck the global central bank tightening plans, to support the economy. This would also help explain why the New Zealand dollar is struggling to follow the recovery path of its closest peers: despite the recent underperformance, NZD remains quite overbought by speculators.Ĭhina seems pretty much at the centre of the global focus at the start of this week.

We are likely witnessing some short-covering among commodity FX: as the latest CFTC data showed, there is a general overstretched net-short positioning in that segment. A slow start to the week in terms of data releases saw markets turning more optimistic on the Omicron variant story and – while still waiting for more details on the vaccine efficacy – pro-cyclical FX has recovered some ground.

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