EUR/USD: a comolex balance between growing inflation and virus fears

While the fundamental bias remains unquestionably bearish on the pair, the state of the forces at work in the short term is reflected in a rebalancing, with the euro continuing to lose points in a context of loss of appetite for risk, and the USD... also, against the backdrop of a violent decline in oil prices, and with the prospect of an adjustment of monetary policy over 2022 with the appearance of the new virus variant.

This variant, about which scientists still know very little, is a thorn in the side of the world's great "money men", the main ones of whom are only just beginning their journey towards monetary normalisation. The head of the Federal Reserve, Jerome Powell, once again cast a pall over the world by acknowledging, in response to a question on the relevance of maintaining the term "transitory" to describe the current inflation peak, that the time had come to withdraw this word... For the Fed Chairman, recently chosen for a second term, if the price increases are globally linked to supply problems, these increases have spread more globally and the risk of sustainably higher inflation has increased. In other words, the whole scenario put forward in recent months has been defeated, and the monetary authority recognises that a more rapid withdrawal of unconventional support measures will have to be discussed, not to mention a tightening of rates.

A scenario of two instead of three Fed rate hikes over 2022 is now gaining the upper hand. In the end, would the appearance of this new variant not grant the most precious commodity: time? This is the thesis defended by JJ Friedman - Chief Investment Officer of VEGA Investment Managers, a subsidiary of Natixis Wealth Management. "If caution is required in the short term, Omicron is giving back time by allowing J. Powell not to give in to the pressure of recent statistics and not to resolve to a more aggressive monetary tightening. In fact, investors now expect the Fed to raise rates twice in 2022, up from three times previously."

Wednesday's traders took note of the final industrial PMI data (purchasing managers' surveys) in Europe. For the Eurozone as a whole, the data did not deviate much from the consensus (58.4 against 58.6 in the first estimate for November). Chris Williamson, Chief Business Economist at IHS Markit, commented on the latest survey figures: "The strong growth in the Eurozone manufacturing sector indicated by the November PMI masks the significant challenges currently facing manufacturers. Indeed, while demand remains high, as evidenced by the further sustained rise in new orders, disruptions to supply chains have been building at a worrying rate. Hindered by input shortages, the average growth rate of production for the fourth quarter as a whole is currently at its lowest level for a year and a half.

At the same time, he added, "the resurgence of the Covid-19 epidemic is clouding the near-term outlook for activity, risking further disruptions to supply chains and a further shift in spending from consumer services to consumer goods, thereby exacerbating the supply-demand imbalance."

On Monday, the ISM PMI also showed little deviation from the target, at 61.3 for November. In addition, the employment survey by the human resources firm ADP reported 534,000 new jobs in the private sector, excluding agriculture. The verdict will come tomorrow with the monthly federal NFP (Non Farm Payrolls) report.

In the immediate future, the two main statistical landmarks of the morning are, on the one hand, the confirmation of an unemployment rate of 7.3% of the active population in the Eurozone, and, above all, a surprise increase of 5.4% in "producer" prices in monthly terms in the Eurozone, i.e. in comparison with October over September. If we compare to October 2020, the surge amounts to 21.9%.

Right now, the pair is trading at $1.1338.

KEY CHART ELEMENTS
The sell-off was strongly reinforced by the break of a technical zone at 1.1530 on marubozu on 10 November. This was a major event, which resulted in a massive release of selling energy. The short term is aligned with the bearish medium term for the Euro/Dollar currency pair, but the entry point is no longer optimal, as the likelihood of a contentious rebound forming at this stage is increasing. Traders will prefer to stay out of the spot market for the time being while waiting for a suitable entry point.