Risk assets resumed downside while demand for sovereign debt of developed countries is rising across all maturities. The market is clearly dominated by risk-off, pending new information on how contagious and lethal the new covid strain, as well as information about effectiveness of existing vaccines. Treasury yields are falling suggesting that investors are withdrawing their bet on the rapid tightening of the Fed's policy, the adequacy of these expectations should be clarified by another speech by Fed head Powell, this time today in Congress. The acceleration of inflation in Germany requires more action from the ECB.

Yesterday's rally was short-lived, selling resumed during the Asian session on Tuesday. European indices are falling by an average of 1.5%, futures for US indices are losing less than 1% at the moment. The commodity market, led by oil, remains under pressure, worries about consequences of the spread of the new strain have not gone anywhere. Powell announced yesterday, as expected, that the omicron poses a threat to achieve the Central Bank's dual mandate - maintaining price stability and achieving maximum employment. Markets interpreted this as a signal that the rate hike will be delayed.

A reassessment of expectations of how quickly the Fed would tighten policy, coupled with higher inflation in Germany, pushed the US-German short-term rate differential down by 20 bp in three days:

Prices in Germany rose by 5.2% on an annualized basis, exceeding forecast by 20 bp. Today there will be data on inflation as a whole for the Eurozone. The chances that the ECB will move faster to slow down the QE rate have increased, which had a positive impact on the euro. Considering that the dollar retreats on all fronts, the main dovish impact came from Powell’s speech yesterday.

Accordingly, with the emergence of positive news associated with the new strain, one can expect that investors will again bet on the rapid withdrawal of stimulus measures from the Fed, which will likely revert USD downside.