Global Risk Asset Rally, Markets Poised for Key Week for Central Banks

Based on the initial data, the Omicron variant does not appear to have greater virulence than the previous variants, and could even be a less harmful variant. Of course, this caused the prices of risk assets to skyrocket all over the world. Rallies of stocks, commodities and corporate bonds emerged, which were encouraged by the highly accommodative monetary and fiscal policies. Currency exchange rates largely followed this trend, with emerging market currencies performing excellently, while safe havens underperformed. The dollar fell against most of its counterparts, which was somewhat surprising.

The central banks of developed countries are preparing to reverse the gigantic monetary stimulus measures that fuel inflation. However, there is still a lot of uncertainty about the timeline and the extent of the phase-out. This week, the Federal Reserve (Wednesday) as well as the European Central Bank and the Bank of England (Thursday) meet. The Fed is expected to be 'hawkish' and the ECB 'dovish'. What the BoE will do, no one knows. The outcome of this crucial week will be determined by the interplay between the decisions of these three institutions, their communications and the expectations of the markets. Below are the main currencies in detail.

Euro

The euro stabilised against the dollar last week, probably partly due to strong German industrial production data. Further, trading remains focused on next Thursday's ECB meeting. Markets expect the central bank to be extremely dovish, and to declare a willingness to continue buying bonds well into 2022 – even as others, especially the Fed, taper their purchases much faster. Nevertheless, there is still hope for the euro. If these expectations are not met, for example because an ambitious tapering plan is presented or a 'hawkish' dissent can be heard within the ECB, this could lead to a sharp rally, in which short positions are hedged.

British Pound