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Currency strategists at Credit Suisse maintain their view that the euro will fall against the dollar, saying the Federal Reserve will “not bail out investor sentiment.”
Stock markets fell following news last week that a more contagious variant of Covid-19 was spreading and that it may elude existing vaccines to some extent.
“The arrival of the Omicron variant poses a new threat to global growth and risky assets, and it is not surprising in this context to see both equity and rate volatility increase over the past week,” he said. said Shahab Jalinoos, Global Head of Currency Strategy at Credit Suisse.
The dollar also fell, with investors betting that the Federal Reserve would be reluctant to tighten monetary policy in 2022 in the face of the new threat.
The euro-to-dollar exchange rate fell from a low around 1.12 to 1.1383, but has since reduced those gains to 1.13, suggesting that the rebound may have little conviction.
Above: EUR / USD daily chart.
- Reference rate EUR / USD at publication:
- High bank rates (indicative band): 1.0918-1.0997
- Payment specialists tariffs (indicative band): 1.1212-1.1257
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Federal Reserve Chairman Jerome Powell said in testimony to U.S. lawmakers on Tuesday that he no longer sees inflation as transient and that the prospect of accelerated “taper” could therefore be heralded at the meeting. the Fed in December.
âUnfortunately for the markets, recent comments from Fed Chairman Powell do not suggest that he is now inclined to become dovish again to bail out investor sentiment,â Jalinoos said.
âOn the contrary, the idea of ââan accelerated reduction is offered instead, acting as an additional signal for the markets to sober up and take stock,â he adds.
Credit Suisse was bullish USD against EUR and JPY before the emergence of Omicron and in a new FX research and strategy note they maintain that the idea of ââa long-term rate divergence in favor of the USD has yet to be eliminated, “despite the instinctive narrowing gap that emerged once news of the new variant broke.”
As such, “we are holding our EURUSD 1.1150, although it may now take longer to reach that level than it seemed a week ago,” says Jalinoos.
Powell has told US lawmakers that the Covid-19 epidemics are inflationary and that it is time to âwithdrawâ the word transitional and that the Fed may consider ending the purchase of QE bonds âa few monthsâ more early.
“We now expect the Fed to increase the rate of reduction from $ 15 billion per month to $ 25 billion so that the reduction is complete in April,” said Mikael Olai MilhÃ¸j, chief analyst at Danske Bank.
Danske Bank now expects three 25bp rate hikes in 2022 in June, September and December. By ending QE bond purchases in April, the door is open for the first rate hike in May. They still expect four rate hikes in 2023.
âGoing long on the dollar will remain an integral part of this cross-asset rotation. Thus, we recommend selling the rally in EUR / USD,â says Lars Merklin, âPrincipal Analyst at Danske.
Commerzbank foreign exchange analysts lowered their forecast for the euro-dollar exchange rate, saying the Federal Reserve will raise interest rates in 2022 amid falling inflation environment.
This would imply significantly higher US “real” yields compared to the euro zone.
“The Fed should look more hawkish next year than the market now suspects,” said Ulrich Leuchtmann, head of currency and commodities research at Commerzbank.
“We therefore consider the rate hikes we expect to be positive for the US dollar and believe the dollar should strengthen next year,” Leuchtmann said.