The euro-dollar pair continues to move away from the current year's lows, correcting against the background of the general weakening of the US currency. Today, EUR/USD bulls made another upward breakthrough, coming close to the resistance level of 1.1390 (the middle line of the Bollinger Bands indicator on the D1 timeframe). This is an important level, overcoming which will allow EUR/USD bulls to count on further price growth, already within the 14th figure.
The notorious Omicron destroyed the entire construction of dollar bulls, which was based on the divergence of the positions of the Federal Reserve and the European Central Bank. For several weeks traders actually ignored the dovish and rather restrained theses of Fed Chairman Jerome Powell, who insisted on a temporary increase in inflation in the United States. Analysts and currency strategists (in particular, the Goldman Sachs conglomerate) de facto "bent their line", convincing market participants that the central bank would be forced to stop the abrupt growth of inflation indicators by tightening monetary policy parameters.
Inflationary publications from release to release "cemented" traders' confidence that the Fed is really implementing a hawkish scenario in 2022. In recent weeks, members of the Fed have also tightened their position – even some of yesterday's doves (for example, Mary Daly). Representatives of the so-called "hawk wing" of the Fed have increasingly begun to declare themselves: for example, James Bullard (who will have the right to vote next year) called for an interest rate increase, and Christopher Waller said it was necessary to accelerate the pace of curtailing QE. Such verbal signals sounded after the latest inflation releases. When it became known that the overall consumer price index in the United States in October accelerated to 6.2% y/y (with growth forecast to 5.8%). This is a long-term record: the CPI was last at these heights more than 30 years ago - back in 1990. In turn, the main index of personal consumption expenditures jumped in October to 4.1% in annual terms – this is also a 30-year high.
It is noteworthy that strong inflation reports were released against the backdrop of the recovery of the American labor market: in particular, all components of the latest Nonfarm came out in the green zone. And the growth rate of initial applications for unemployment benefits last week came out at the level of 199,000 (with a forecast of growth to 260,000). This is a 52-year record – the last time the indicator was at such lows was in 1969.
In other words, the fundamental background contributed to the further strengthening of the US currency and, consequently, the further decline of the EUR/USD pair. Hawkish expectations about possible Fed actions grew "by leaps and bounds", supporting the greenback. The single currency, on the contrary, was under pressure from the ECB's dovish position.
That is why such a sharp and unexpected "plot twist" exerted such strong pressure on the US dollar. The new version of the Omicron coronavirus has redrawn the fundamental picture, reducing the likelihood of a hawkish scenario - at least in its maximum version (early completion of QE and a double rate hike in 2022). The US dollar index has dropped to 95.60 today (despite the fact that a week ago it was approaching the boundaries of the 97th figure), against the background of a sharp decline in the yield of 10-year treasuries.
By and large, traders are afraid of the unknown, since WHO experts have not yet made a final verdict on how dangerous the new strain is. How contagious it is, how hard the human body tolerates it, whether vaccines cope with it – all these questions are still unanswered. There are only assumptions. Nevertheless, the oil market has already sunk by 5%. This happened after the head of Moderna questioned the effectiveness of the COVID vaccine against the strain. With his rhetoric, he scared the financial markets and added concerns about the demand for "black gold".
But - I repeat – it is too early to make any final conclusions about the new strain. Many experts say that there are no objective reasons for panic: to date, scientists cannot even say with certainty that the new variant is more contagious, not to mention the severity of the disease and the mortality rate. In addition, the widely replicated ability of Omicron to bypass immune protection has not been scientifically confirmed. For scientific confirmation of such an assumption, more time is needed – at least a few weeks.
It should be recalled here that in August, another strain of coronavirus – "Iota" – was also found in the US, which was supposed to be able to significantly increase the mortality rate from infection. The press trumpeted that this variant of the virus is transmitted 15-25% faster than other known mutations. American journalists claimed that this option "can significantly increase the mortality rate from infection." Even the results of some observations were cited – allegedly the mortality rate increased by 46%, 82% and 62% among people aged 45-64 years, 65-74 years and over 75 years, respectively, compared with the indicators calculated for other strains.
In the wake of these reports, the US dollar then similarly lost its positions – the EUR/USD pair grew by almost 200 points in mid-August. Then the "Iota" theme gradually faded away and the market returned to its previous fundamental benchmarks.
Of course - Iota cannot be compared with Omicron in the context of many parameters and existing risks voiced by WHO. But at the same time, we must not forget that the current growth of EUR/USD is due only to the weakness of the greenback, who is in a somewhat confused state due to "new input data". If scientists confirm the assumption that the disease caused by Omicron is transferred much more easily than infection with Delta, the dollar will quickly return the lost ground. Yesterday, the market was frightened by the rhetoric of the head of Moderna, while today Pfizer representatives promised to deliver the first batch of a new version of the vaccine adapted to the new strain in 2-3 months. In addition, they assured reporters that the immune protection against severe infection and death "remains high."
In other words, despite the impulsive growth of EUR/USD, long positions for the pair look risky. This "house of cards on loose sand" can collapse at any moment. Therefore, at the moment it is advisable to take a wait-and-see position, observing the behavior of the pair near the resistance level of 1.1390 (the middle line of the Bollinger Bands on the daily chart).