Among all the themes that drove the markets this week, two main ones can be distinguished. The first is uncertainty caused by the new strain, which, by the way, is rapidly unwinding thanks to positive news flow. The second is the Fed's growing concern about inflation and hints that the rate of asset purchases from the market may slow down faster. In the absence of any surprises on the “omicron”, today's NFP data should make the Fed story the main one and will most likely provide short-term support for the dollar.

The reshaping of the yield curve this week reflected well the impact of these two themes on the market. Long rates declined in response to the uncertainty surrounding the economic consequences of the spread of Omicron, while short rates, on the contrary, actively resisted due to the strengthening of the Fed's hawkish rhetoric. As a result, the spread between 10 and 2-year Treasury rates (the very “harbinger of a recession”) lost almost 19 bp in 4 days:

The narrow-minded interpretation of this spread is that the economy is heading for a recession or the Fed is going to tighten the screws too much.

This week, the US Central Bank made it clear that it does not consider inflation to be temporary. Powell said that the word "temporary" is no longer appropriate to describe the current inflation, which came as a big surprise, given that the Fed had said otherwise in the summer. The ECB also acknowledges that inflation is taking root but has stubbornly ruled out a rate hike next year. Earlier, Lagarde said that the ECB will not leave price increases without response, however, a rate hike is unlikely. The Fed is now much more decisive and a solid report on US employment today will increase pressure on the US Central Bank to phase out stimulus faster as the recovery in employment approaches targets.

Job growth is expected at 500 thousand. A decrease in unemployment and an increase in the pro-inflationary factor - wages are also expected. A stronger than forecast decline in unemployment (3.8% is considered full employment) or growth in wages (more than 0.4% in monthly terms) could lead to a significant short-term strengthening of the dollar today.

Typically, when the US yield curve flattens, the dollar rallies against pro-cyclical currencies, which is no surprise as monetary stimulus starts to slow down and growth prospects deteriorate. Among the G10 currencies this week, the weakest against the dollar were the currencies with a strong pro-cyclical component - AUD, NZD and NOK. In the meantime, testing is planned for AUDUSD and a possible breakdown of the lower border of the bearish channel, which can be a good opportunity to catch a short-term reversal in the pair:

It’s procyclical peer NZDUSD is in a similar position: