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Omicron breakout cools interest in risk assets

Key issues currently driving the FX market:

·         US Federal Reserve spokesman Christopher Waller said rates could be raised as early as March.

·         UK Brexit minister Lord David Frost said that not enough progress has been Made on the Northern Ireland Protocol.

·         Decline in stock indices.

By the end of the week, major currencies closed down. The steepest losses were shown by the Canadian dollar (-1.31%), the New Zealand dollar (-0.90%), the euro (-0.71%), the Australian dollar (-0.64%), the Swiss franc (-0.38%), the Japanese yen (-0.33%), and the British pound (-0.25%).

On Friday, December 17, trading in the euro ended in decline. The euro fell 0.82% to 1.1237. The rally of the dollar was caused by the representative of the US Federal Reserve Christopher Waller. He said that rates could be raised as early as March, after the decision to stop buying bonds earlier than planned.

Waller's hawkish comments negatively affected US stock indices. Some of the volatility in the markets can be attributed to Friday’s quadruple witching, or the simultaneous expiration of stock index futures, stock index options, stock options, and single stock futures, as well as quarter-end fund rebalancing.

Trading in the euro ended in decline on Friday, December 17. The single currency fell 0.82% to 1.1237. The dollar rallied on the back of remarks by Federal Reserve Governor Christopher Waller, who claimed that rates could be raised as early as March, after the decision was made to halt bond purchasing earlier than planned.

Quadruple Witching Day happens four times a year, on the third Friday of last month of each quarter. Heightened volatility tends to occur on such days, with big swings in either direction.

UK Brexit Minister Lord David Frost added a negative boost to major currencies. In an interview with the FT, he said on Friday that not enough progress has been on the Northern Ireland Protocol. Frost added that burdensome customs arrangement and the way EU rules are applied need drastic change. Frost tendered his resignation.

Today’s maxcro agenda (GMT +3)

  • 12:00 Eurozone: current account (October)
  • 14:00 UK: CBI industrial trends orders (December)
  • 18:00 US: CB leading index (November)

Current outlook

The DXY index opened higher and oil prices lower in APEC trading. Major currencies have been showing mixed performance. Risk-sensitive assets are trading in the red, likely due to mounting anxiety about the spead of the Omicron variant.

London Mayor Sadiq Khan has declared a state of emergency in the city due to a spike in the number of Omicron cases. He did not announce any new restrictions to combat the virus. On December 17, Britain recorded an all-time high of daily infections: 92,907.

The Netherlands has imposed a strict lockdown from December 19 to January 14, 2022 to curb the spread of Omicron. Only shops selling essential goods will remain open. Negativity was exacerbated by the news of the death of a New Zealand man who received the Pfizer vaccine.

This week’s economic calendar looks thin and will be shorted due to Christmas celebrations in Europe and the US. Trading volumes will decline towards the end of the year and will recover after January 3, 2022. The lower the liquidity, the higher the market volatility.

Technical analysis

Price action has remained in the November 30 range since the beginning of December. Against the backdrop of negative news, sellers expanded it from 1.1235-1.1383 to 1.1222-1.1383. Lockdowns and expectations of a Fed rate hike in March will put pressure on the euro. If the 1.1200 level holds until Wednesday, buyers will have a chance to retrace to 1.1350 by closing short positions. Given that the euro closed lower ahead of the weekend, so today we expect to see a move against Friday back up to the 1.1290 55-day SMA (balance line).

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