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Dollar in focus as Powell provides first Omicron reaction


MongiIG

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Powell’s reaction could bring renewed volatility for the dollar which has lost ground on a potential shift in Fed outlook.

bg_usd_361507367.jpgSource: Bloomberg
 Joshua Mahony | Senior Market Analyst, London | Publication date: Monday 29 November 2021 

Dollar weakness holds as markets await Powell comments

The US dollar was hit hard on Friday, with markets primarily focusing on the potential monetary policy impact of Omicron.

With the greenback typically seen as a haven, we are used to seeing the dollar appreciate when markets crumble. However, the potential for a significant step change in the outlook for monetary tightening at the Federal Reserve (Fed) saw positions built on tighter Federal Open Market Committee (FOMC) policy unwind.

That brought about the curious position where the dollar index suffered as markets tanked. From a monetary policy perspective, we had been moving towards a potential move where the FOMC could ramp up tapering and bring forward their first rate hike.

The table below highlights the current market pricing around that first Fed rate hike, with June still priced in as the month in question.

FED_RATE_HIKE_291121.PNG.pngSource: Refinitiv

This evening will see traders pay close attention to the words from Jerome Powell as he delivers the opening remarks at a Federal Reserve Bank of New York webinar.

There is still plenty of uncertainty around how things will play out given the risks involved in this seemingly more transmissible Omicron Covid variant. Thus, there will likely be a somewhat cautious approach from Powell.

Nonetheless, with the dollar expected to be heavily influenced by any changes in the outlook for monetary tightening, traders should closely follow signals on which way the Fed could move if this variant brings renewed restrictions.

Dollar weakens, but uptrend remains intact

The dollar index remains within an uptrend for now, with weekend claims that the Omicron variant could be more mild in nature providing a bit of a bounce today.

Friday’s selloff looks to have brought a retracement thus far, with a break below the 95.47 swing-low required to negate that current bullish pattern.

Until then, this 61.8% support level looks to have brought some short-term reprieve as we head into a notable appearance from the Fed chair.

DX-4-hours-2021_11_29-15h30.pngSource: ProRealTime

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