File image of Jerome Powell © Federal Reserve.
The pound sterling exchange rate against the dollar was showing strong daily gains before the Federal Reserve chairman warned that a rate hike could come sooner than expected.
Jerome Powell said it would be “reasonable to think about closing the cut a few months earlier” if the fears about the Omicron variant turned out to be overblown.
The dollar surged on the comments, reversing widespread losses suffered earlier, confirming that the market was reassessing prices for a slower slowdown in the Fed’s monetary stimulus.
The Fed began reducing the amount of bonds it bought as part of its quantitative easing program in November with a view to ending them completely in the first half of 2022, but the emergence of the Omicron variant has seen investors are starting to expect this timeline to be extended.
That would mean the first rate hike would come later than expected ahead of last Friday’s Omicron sell-off.
“Jerome Powell has taken a surprisingly hawkish stance, with the Fed chairman saying he could see the downsizing process accelerate if Omicron’s current fears prove to be unfounded,” said Joshua Mahony, senior market analyst at IG.
The pound-to-dollar exchange rate fell from a daily high of 1.3368 to a low of 1.3196, the euro-to-dollar exchange rate was as high as 1.1383 before falling as low as 1, 1236.
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Prior to Powell’s testimony to U.S. lawmakers, the stock markets had been volatile, falling sharply earlier today on comments from Moderna’s boss that the current vaccines would likely prove less effective against the Omicron variant.
The losses were reduced following comments from Uğur Şahin of BioNTech – the inventor of the vaccine that Pfizer makes and distributes – that the new variant could lead to more infections, but those vaccinated will likely remain protected from disease. serious.
The University of Oxford, which invented the vaccine distributed by AstraZeneca, also offered supportive news with a statement that read:
“Despite the emergence of new variants over the past year, vaccines have continued to offer very high levels of protection against serious disease and so far there is no evidence that Omicron is any different.” .
Amid tense investor sentiment, it was expected that Powell would welcome the risks posed by another potential wave of Covid linked to Omicron and sound an air of caution.
But his claim that rising inflation means withdrawal from supportive monetary policy must continue seems to have come as a surprise.
“Another comment from Jerome Powell on the economic and inflation risks posed by this latest strain of Covid shows how the bank remains able to tighten policy further if necessary,” said Mahony.
“We remain in a phase of uncertainty, the Fed having to adjust or reiterate its political position once scientists have provided greater clarity on this tension,” adds Mahony.