Choppy trading is greeting us to finish 2021, the themes we have been highlighting for the past three months remains solid, but we did see some interesting cracks forming in policy.
What’s in a word?

So much has been made of the word ‘transitory’ – its ambiguity has been discussed over and over again. However, this ‘debate’ was finally put to rest as Powell and Co. admitted it was no longer useful in its communications and that it may not be the best term to describe inflation. It’s quite a change and is probably the first real example of a mis-communication step since taking the positions. However, the more important take out from his testimony was his statement that the FOMC will discuss accelerating the pace of tapering at their coming meeting. He said it was appropriate to consider faster tapering and that the Fed must ensure that inflation does not become engrained, tricky considering the COVID-19 pandemic will linger into 2022 and thus so will supply chain bottlenecks.

On Omicron – “for now it is a risk to the baseline. It is not baked into our forecast”. A haven leaning FX has taken all this is a safe haven lean. The DXY is flat but that doesn’t show the larger forces at play here. EUR/USD has moved back up over the week to $1.1310 but looks weak on the rising caseloads in Europe and likely restriction coming in Germany, France and elsewhere. GBP/USD also moved higher to $1.3350, but quickly reversed falling back to $1.3265 USD/JPY is the biggest mover and the haven lean most acute in this pair. It is following the fundamental link with US Treasury yields. SO as yields fell so did USD/JPY down to ¥112.80 it was ¥115 just a short 7 days ago. AUD/USD rallied to $0.7173 but this has quickly evaporated and is now sub-$0.71 a new 3 month low.