US Open Note – Dollar weakens as risk aversion grows

Fed Chair Powell to draw focus; Chicago PMI and consumer confidence eyed

Market sentiment has weakened, and the greenback has taken a hit as concerns regarding the omicron variant have resurfaced. Disappointing comments from the CEO of Moderna on the efficacy of current vaccines along with concerns from the Fed Chair Powell seem to be the culprits.

Federal Reserve Chair Powell mentioned that the omicron variant brings with it uncertainty around inflation and thus could upset growth prospects. The strain of the virus could also slow the recovery in the US job market and prolong supply chain disruptions, which have kept price pressures elevated. The important aspect is whether the new omicron virus variant will cause new restrictions on movement and whether it could derail the Fed’s policy tightening, or push back the timeline of rate hikes.

On another note, the omicron variant is likely to push tightening plans of the ECB, BOJ and SNB further into the horizon, thus these delayed policy outlooks could feed future strength in the dollar.

That said, the reserve currency has surrendered ground despite weaker market sentiment with the dollar index trading around 95.78. In the forex arena, haven currencies are seeing oversized moves. The yen and the Swiss franc are outperforming with USDCHF at 0.9177 and USDJPY at 112.80.

At 14:45 GMT, the US Chicago PMI figures are due, and the November data is expected to stay elevated, forecasted at 67.0, signalling a sturdy expansion in the manufacturing sector despite supply constraints.

Inflation pokes at Europe

Eurozone inflation in November rose by a record annual 4.9%, the highest ever, which puts pressure now on the ECB moving into its next meeting, even though ECB President Lagarde and the doves still hold the upper hand. The infectious omicron variant poses a threat, and should new lockdowns and restrictions unfold, this could hurt output and weigh on supply chains.

Nonetheless, the euro has edged higher, touching the $1.1370 level, also in a risk-off environment in the US. The pound failed to capitalise on dollar weakness, holding around the $1.3340 mark.

Canadian GDP, oil haemorrhages

Canadian GDP edged higher by 0.1% in September, boosted by broad-based expansions in services-producing industries as well as mining, which compensated for the drop in construction, manufacturing, and retail trade.

The continued global shortage of semiconductors and other supply chain disruptions have played their part in hindering manufacturing across industrial sectors.

Oil continues to fall with omicron variant uncertainty and expected delivery of 50mln barrels from the strategic reserves of the US.

It will be interesting to see whether OPEC follows through on its planned output increases in January, under the current trying circumstances. WTI oil futures are trading around the $67.00 per barrel mark.

Fed Chair Powell is due to speak at 15:00 GMT as is Treasury Secretary Yellen. Subsequently US consumer confidence will also be released.

FOMC Members Williams and Vice Chairman Clarida are scheduled to speak at 15:30 and 18:00 GMT respectively.

Australian Q3 GDP is set for 00:30 GMT following a huge miss in September building approvals, which dropped 12.9%, coming in weaker than August numbers of -1.4%.

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