EUR/USD: inflation, normalisation, restrictions, etc.

While the underlying bias remained bearish on the pair, last week saw a string of dojis centred around $1.13. The feeling of perplexity was fuelled by the appearance of a new variant of the virus. A phenomenon with still unclear consequences, which adds a new peak to the inflation/monetary normalisation/virus triangle.

"The resurgence of the pandemic is less worrying than a continuation of inflation" for Emmanuel Auboyneau, AMPLEGEST Associate Manager, for whom "global growth is currently solid, driven by strong consumption, corporate reinvestment and an improvement in international trade". On the other hand, the supply crisis, linked to malfunctions in the production chain and tensions in the labour market [...] are causing fears of more lasting inflation than expected, particularly in the United States.

Inflation, a term from which the adjective 'transitory' is gradually being removed. Federal Reserve boss Jerome Powell threw a spanner in the works again when, in response to a question about the appropriateness of maintaining the term "transitory" to describe the current inflation spike, he acknowledged that the time had come to withdraw the 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 with two instead of three rate hikes over 2022 is therefore now gaining the upper hand. In the end, would the appearance of this new variant not grant J. Powell the most precious asset: 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 time back to J. Powell to avoid giving in to the pressure of recent statistics and to avoid a more aggressive monetary tightening. In fact, investors now expect the Fed to raise rates twice in 2022, compared to three times previously".

In terms of stats, the two main benchmarks of Friday morning were on the one hand the confirmation of an unemployment rate of 7.2% of the active population in the Eurozone, but above all a surprise rise of 5.2% in "producer" prices in monthly terms in the Eurozone, i.e. in comparison with October over September. If we compare to October 2020, the increase amounts to... 22%. In th US, the Labour Department published an encouraging statistic on employment with new registrations for unemployment benefits in the order of 220,000 for the past week.

In the meantime, traders have just taken note of the final data for the PMI Services activity indicators. For the Eurozone as a whole, the index came in at 55.9, slightly below expectations. Composite data (including industry) is now available. Chris Williamson, chief economist at the Institute, warns: "Any improvement in the rate of economic growth signalled by the Eurozone PMI is likely to be short-lived. Not only has demand growth weakened, but business expectations for future growth have also fallen as concerns about the pandemic intensify again. With the data collected prior to the announcement of the Omicron variant, sentiment about the short-term outlook will inevitably have been further shaken, for both industry and services. More resilient expansions are being recorded in Spain and Italy, although even here recent gains are at risk if social distancing restrictions are to be tightened."

Right now, the pair is trading at $1.1291.

KEY CHART ELEMENTS
The shorting trend was strongly reinforced by the break of a technical zone at 1.1530, on marubozu on November 10. 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.