The markets, alarmed by the appearance of a new strain of coronavirus "Omicron", breathed a sigh of relief. The short respite was facilitated by the refusal of the US authorities to strengthen restrictive measures in the country and the cautious growth of the US dollar.
The relative calm of the US dollar was helped by the reassessment of the risks associated with the emergence of a new COVID-19 mutation. The markets took a deep breath, rightly deciding not to panic. Investors were given confidence by fairly positive forecasts about the US currency for 2022. ING bank analysts drew attention to the general background in the currency market, which remains very favorable for the dollar.
The reason for this is the positive macro data on the US economy, which inspired investors with hope for an early reduction of incentives from the Fed and an earlier tightening of the monetary policy. However, ING warns of a possible collapse of the US dollar next month. The driver of the potential collapse may be a new strain of "Omicron". The implementation of such a scenario will jeopardize the Fed's previous plans for the MP.
Many analysts fear a long period of instability in the currency markets since the new coronavirus mutation has not yet been studied. The unknown is fraught with danger, so even short-term market forecasts are difficult. However, experts remain calm. Goldman Sachs said that they would keep the previous economic forecasts, despite the appearance of a new variant of COVID-19. Societe Generale's currency strategists also stressed the uncertainty of the economic prospects of the US economy and the US dollar.
It should be noted the status of a safe haven currency gives an advantage to the US dollar, making it attractive to investors. In moments of uncertainty in the market, this currency is able to extract the greatest benefit from the situation. However, the new strain of "Omicron" may be the factor that will negatively affect the Fed's decision to raise rates.
The current recovery of the US currency was facilitated by the relative equilibrium in world markets. On Tuesday morning, the greenback was above the weekly low compared to other leading currencies. The EUR/USD pair was trading at the level of 1.1311. According to analysts, bullish sentiment has prevailed in the pair since the beginning of this week. In case of a sharp reversal of the EUR/USD pair, they may change to the opposite.
Experts believe that the reason for the US dollar's short-term rise is the easing of concerns about a new coronavirus mutation that can become a time bomb for the US economy. Market participants are worried that the new threat would become a stumbling block for the Federal Reserve, which would delay the rise in interest rates. Earlier, Fed Chairman Jerome Powell said that the new strain of Omicron poses risks for achieving a stable level of inflation and for returning to maximum employment.
At the same time, the head of the regulator did not touch on key issues related to specific steps to normalize the monetary policy and the intensity of reducing the purchase of actives. However, other Fed officials, in particular Raphael Bostic, president of the Atlanta Fed, did not ignore either the new COVID-19 mutation or the risks associated with it. According to R. Bostic, the danger of a new strain of coronavirus for the US economy is greatly exaggerated. The President of the Federal Reserve Bank of Atlanta supported the early curtailment of the asset repurchase program. He is confident that the optimal timing for its implementation is the end of the first quarter of 2022 or the beginning of the second.
According to analysts, the problems associated with the COVID-19 pandemic do not interfere with the confident recovery of the US economy. This allowed JPMorgan Chase & Co. economists to improve their estimate of its annual growth, increasing the indicator to 7% from the previous 5%. Further forecasts are possible with the availability of new macro data for November 2021. It is expected that the Fed will receive them by the next meeting of the Open Market Committee (FOMC) scheduled for December 14-15. Experts are counting on relatively positive reports on the US labor market and inflation data.