Obstacles Appear

Just as bulls thought they were finally beginning to run with the ball, it seems the news of the Omicron variant has well and truly screwed up the play. Fed chairman Powell is due to testify at the Senate Banking Committee later today. However, Powell’s planned comments were released by the Fed last night and suggest a great deal of caution has moved into the outlook with regard to the Omicron variant.

Powell: Downside Risks

In his comments, Powell noted: “The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation.” The Fed chair went on to say: “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labour market and intensify supply-chain disruptions.”

Fed Tightening Expectations Dashed

Ahead of Friday’s new regarding Omicron, the market had been ramping up its Fed tightening expectations in response to a slew of better data recently. Inflation in particular has been soaring higher, while other key indicators, such as retail sales and employment readings, have also been on the rise. With this in mind, traders anticipated that the Fed would likely need to step up the pace of its tightening program, forecasting also that the Fed would likely raise rates ahead of schedule also.

However, in light of the news and the fears regarding the severity of this new strain, traders have since scaled back their tightening expectations with USD under selling pressure as a result. With many countries around the globe closing their borders, imposing fresh lockdowns and the risk that many more will be forced to follow suit if the new variant proves to be as dangerous as initially thought, then this could easily derail the US and global recovery.

NFP Up Next

In light of the current news, Friday’s employment readings in the US will likely take something of a backseat. A solid number, while still positive, will struggle to be viewed as a reason for tightening given the fresh risks in the Fed’s outlook. Additionally, if there is any weakness in the data this will likely amplify the current selling, weighing on USD further.

Technical Views

DXY

The decline from just ahead of the 97 level has seen DXY trading back down into the bull channel. However, we have seen buying into the dip and, while price holds above the 95.61 level, the focus is on further upside. A break below 95.61, however, would likely be accompanied by a shift in momentum readings, paving the way for a deeper correction.