Omicroncerns clouding the monetary outlook ahead of year end

Despite lingering uncertainties around Omicron, the US dollar is still poised to end the week lower as markets remained fairly optimistic throughout the first half of the week. Last week’s market convictions that Omicron may be more transmissible but less impactful have been confirmed by the World Health Organisation on Wednesday, which markets took as good news along with Pfizer’s statement on Tuesday indicating a third shot would offer protection against the variant. Despite the cautious optimism in markets, the UK went on to announce renewed measures including work-from-home advice and mask-wearing as the Covid case count continued to surge. Germany may see renewed restrictions ahead of Christmas with new Chancellor Olaf Scholz vowing to make decisions as quickly as possible. In the monetary space, the Bank of Canada and National Bank of Poland followed the market consensus, with both respective currencies mildly weakening on the back of the announcements, but price action remained limited overall. On Friday, US CPI printed in line with expectations, keeping policy expectations for the Fed unchanged. Next week, volatility is expected to pick up one last time before markets break for the holidays as 9 central banks are scheduled to announce their policy decisions. All of which are likely to be clouded by concerns over the impact of the Omicron variant.

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Authors: 

Simon Harvey, Senior FX Market Analyst

Ima Sammani, FX Market Analyst

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