FX markets face central bankers bonanza: the pound and the euro at risk, the dollar and the Norwegian krone with opportunities (Daily analysis 15.12.2021)

In the second part of the week, market events will intensify with a series of meetings of the most influential central banks, including the Federal Reserve.

The next coming hours will be a test of how individual central banks assess the risks associated with the omicron. At the same time, these should be the last key events before the Christmas and New Year season of reduced investor activity.

The pound: data versus omicron

It is safe to say that monetary authorities around the world are caught between a hammer and an anvil. The potential return of restrictions may temporarily weaken economic growth, but at the same time additionally - and probably for a longer period of time - boost the path of inflation by intensifying disruptions in global supply chains. It seems that the Federal Reserve, which is facing its highest level in almost forty years, and also, for example, Norges Bank, should be looking through their fingers at epidemic risks. This would be an opportunity for the Norwegian krone to break out of its weakness. The omicron hits oil prices, which pushes the EUR/NOK pair away from 10.00. The European Central Bank may show more concern, and once again, the Bank of England's decision will weigh on the knife edge.

The evaluation is certainly clouded by the latest data published today and yesterday morning. Consumer inflation accelerated from 4.2 to 5.1% year-on-year, and the core rate climbed to a record 4%. At the same time, the number of cases of the omicron variant of the coronavirus doubles every two to three days, and the weekly average of new infections exceeds 50,000. The start of the tightening cycle was postponed in November, strongly undermining the position of the pound. A replay hangs in the air, which could once again push the British currency on the defensive. Last week it was the weakest among the G-10.

The US dollar: the Fed's attitude will be supportive again

This autumn, the primal cause of the EM currencies' troubles became the growing belief that the Federal Reserve will quickly abandon its crisis policy and start raising interest rates in the middle of next year. It should be assessed that the current values of inflation dynamics are well above the "pain threshold" of the monetary authorities. As a result, at today's FOMC meeting (with the final at 8:00 p.m.), the turn towards a more restrictive policy will probably continue.

This means that the Fed should announce a more decisive tapering of asset purchases, disregarding new epidemic threats. The tapering should be completed in Q1 next year, three months ahead of the originally (back in November) planned deadline. This, in turn, paves the way for faster interest rate hikes, which should be reflected in the new forecasts and is an opportunity for a stronger dollar. However, it should be remembered that the aggressive policy normalization is already largely priced in, and Conotoxia forecasts do not assume new records of the US currency strength. The bar of expectations is set very high, and a potential disappointment may cause a significant (and asymmetrical) reaction.