Renewed COVID Fears Hit Markets, Supports Euro

In the currency markets, this fear manifested itself in a traditional flight to safe havens such as the Japanese yen and the Swiss franc. The euro also rose after expectations of interest rate hikes by the Federal Reserve were tempered and the gap with the ECB widened. All other major currencies fell against the U.S. dollar. In emerging markets, the Brazilian real was the exception, which managed to maintain its course. The Turkish lira had another disastrous week as markets unanimously turned against President Erdogan's eccentric positions on monetary policy.

Markets' attention would normally be focused on the most important earnings releases. This week, it was the short inflation report for November from the Eurozone and the US employment data for October. However, the uncertainty surrounding the new Omicron variant and the lack of information about its infectiousness means that the market reaction to news from health authorities could shoot either way. We expect the correlation between risk aversion to the euro, the US dollar and emerging markets to persist until that uncertainty subsides.

Major currencies in detail:

EUR
Last week, the news from the eurozone started to get better. The main PMI indices for business activity in November turned out to be surprisingly positive. The number of corona infections is still worrisome, but it seems that the economic impact of this wave is smaller. The PMI news helped stabilize the euro. Amid Friday's sell-off, the price rose sharply as short positions in euro were quickly disposed of. This week's inflation report could be disruptive. Headline inflation could easily reach 5% instead of 4%, a level we haven't seen for decades. Core inflation is also likely to be well above the ECB's theoretical target. How these numbers should fit in with the ECB's ongoing dovishness is an issue we hope to hear more about between now and the critical meeting in December.

GBP
Due to the mixed data (weak PMI indices for business activity vs. many industrial orders) and messages from the Governor of the Bank of England and its chief economist in which no commitment was made, there was little trading activity between the British pound and the US dollar. Friday's risk aversion turned somewhat surprisingly positive for the pound, which ended the week virtually unchanged against the US dollar and the euro. This week's news from the UK will be light. We hope that Catherine Mann, a member of the monetary policy committee and a hawkish policy advocate, will shed some light on the state of the Bank of England's discussions on when to start tightening on Tuesday. In addition, we are of course hoping for news about the new corona variant.

USD

The Federal Reserve's November meeting report turned out to be more hawkish than expected, sending the dollar into Thanksgiving on a solid footing. The impact of the sell-off on the dollar was mixed. On the one hand, the currency benefited in part from the outflows to safe havens. On the other hand, the currency suffered from expectations of interest rate hikes in 2022, which were revised downwards. The U.S. jobs data for October is expected to be excellent due to another decline in unemployment, many new jobs and higher wages, although they are not high enough to keep up with inflation. However, we expect the impact of planned earnings releases and monetary policy news to be overshadowed by news about the Omicron variant of the coronavirus.

By: Enrique Diaz-Alvarez

Enrique Diaz-Alvarez is chief risk officer and heads Ebury's analyst team in New York. Because of his drive, passion and thorough knowledge, Enrique is recognized by Bloomberg as one of the most accurate predictors of market movements.

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