Monex: EUR/USD on the rise as Omikron concerns ease

Monex: EUR/USD on the rise as Omikron concerns ease

Valuta
Corona-virus (01)

By Ima Sammani, FX Market Analyst, Monex Europe

EUR
 
EURUSD has been rising since yesterday afternoon amid an improvement in risk appetite as Omicron fears eased. Tensions between Russia and Ukraine and potential sanctions will remain at the forefront in Europe after a phone call between Joe Biden and Vladimir Putin where Biden was clear about sanctions.
 
US officials have told members of Congress yesterday that Germany made commitments about the Nord Stream II pipeline that runs from Russia to Germany. As the US is concerned Russia will invade Ukraine, US national security adviser Jake Sullivan implied the Nord Stream II pipeline is under threat if Russia invades Ukraine.
 
Elsewhere in Europe, focus will be on the National Bank of Poland today where expectations of a firm rate hike should keep the zloty supported. In the eurozone, a series of European Central Bank speakers at the European Systemic Risk Board conference will be eyed, although not much new is expected just a week before the ECB policy meeting.
 
USD
 
The dollar fell overnight with risk sentiment improving following easing fears around the Omicron variant. The absence of any surges in hospitalisations linked to the Omicron variant despite the rise in cases suggests that while transmissibility is strong, Omicron may cause milder symptoms.
 
This is especially the case in South Africa where vaccination rates sit at roughly 25%. Along with that, US Scientist Anthony Fauci confirmed yesterday that early indications suggest Omicron is not worse than prior strains, and possibly milder, although it would take weeks to judge the severity wholly.
 
The improvement in risk appetite came despite the difficult phone call between Joe Biden and Vladimir Putin about the Russia-Ukraine Crisis. Biden clearly stated Russia cannot go ahead with invading Ukraine because they will face sanctions if they do. Additionally, the US will push Germany to agree to stop the Nord Stream II pipeline if the invasion occurs.
 
GBP
 
Despite messages from 10 Downing Street and the US Chief Medical Advisor to the President, Anthony Fauci, that the latest variant poses a less severe health risk despite its higher transmissibility, the pound struggled in yesterday’s session despite the dollar broadly weakening against high beta currencies. Sterling’s turnaround can be traced back to when the US market came online, which prompted a fresh dollar bid in a very uneventful trading session.
 
Despite weakening over the course of the session, appetite was still there by traders to pick the pound up close to its one-year low and minimise losses over the course of the day. Further upside in sterling is likely to be capped by the growing consensus call that the Bank of England won’t hike rates at next week’s meeting, with overnight interest swaps now pricing in only 2bps of rate hikes.
 
While headlines around the efficacy of vaccines against the variant could dramatically change this pricing, we think markets have got this one right as the Bank of England finds option value in holding fire until February’s meeting. HSBC yesterday caught headlines with a note stating that they are looking for a 9-0 vote split for holding rates in December due to Omicron uncertainty. Today, the pound trades on the front foot but gains are fairly limited.