Outlook Darkens

The near term outlook for the Euro has weakened dramatically in the face of the current omicron outbreak. Surging infection levels in the eurozone over Q3 worsened across Q4 as the omicron outbreak took hold. In light of the new wave, several countries were forced to take measures, of varying severity. However, as the outbreak continues and the weather grows colder into winter, we are seeing a worrying of trend of greater restrictions being announced. The fear is, that following Christmas (which is expected to see a spike in infections) and with the winter developing, greater restrictions will be needed in Q1.

Restrictions Returning

Restrictions have returned in several key EZ countries such as France, Germany, Ireland, the Netherlands, Spain and Portugal. With Christmas approaching, many countries are setting out fresh restrictions, including Germany where the government announced this week that as of December 28th, private gatherings will be limited to ten people and nightclubs will be closed. In the Netherlands, restrictions are even tighter with the country currently in lockdown until mid-January.

WHO Warning

The WHO warned this week over the risks from the current omicron outbreak in Europe, forecasting a “significant surge” in infections after Christmas. While initial data suggests that the new variant s milder than Delta, the issue is that high levels of infections still create a great deal of pressure on healthcare systems. Additionally, risks of serious illness remain elevated in the unvaccinated.

Market Reaction

In terms of how markets are reacting to news of the current uptick in restrictions as we head into the end of the year, bond yields in the eurozone have been seen trading higher in recent days. Traders have been turning to safe-haven assets over higher yield, risk assets such as equities and commodities, a theme which is likely to develop further.

Inflation Impact

Still, despite the risks around omicron, the impact on eurozone inflation is not clear cut. This week we heard ECB’s Muller warning over two-way inflation risks around omicron. Muller warned that a great deal of the impact on inflation will depend on how governments and companies respond to the virus. During an interview yesterday, Muller said: “If there are further lockdowns and sharp restrictions on the economy, demand could decline and more likely could result in downward pressure on inflation. On the other hand, if supply-chain problems, for instance, last longer due to omicron, there could be upward pressure on inflation.”

Technical Views

EURUSD

For now, EURUSD continues to trade within the tight block of consolidation between support at 1.1190 and resistance at 1.1377. With both MACD and RSI bullish, there is still a chance that we break higher here, in which case, I’ll be watching price as we test the bear channel top and resistance level around 1.1527. To the downside, if we roll from here, a break of 1.1190 will open a test of 1.10 next.