Elevated volatility to greet the festive season

Publish Date 01 Jan 0001
Market Analysis /
Milan Cutkovic / Last Update 20 Dec 2021

HIGHLIGHTS

  • Stock rise and rising pandemic may tempt traders to take some profit ahead of the year-end
  • Omicron set to weigh on economic outlook and depress market sentiment further
  • Central bank meeting fallout puts spotlight clearly on inflation
  • Last week’s GBP rally is already fading and the risk for a dovish repricing is high
  • Fears that new restrictions could hit fuel demand put USOIL under renewed pressure

 

Key Events This Week

Tuesday

  • Australia - RBA Meeting Minutes
  • UK - Retail Sales

Wednesday

  • Japan - Bank of Japan Monetary Policy Statement
  • UK - GDP
  • United States - GDP
  • United States - Existing Home Sales

Thursday

  • United States - Initial Jobless Claims
  • Canada – GDP

 

Turbulence ahead

While the economic calendar for the new trading week is pretty light, volatility is likely to remain at elevated levels ahead of the Christmas holidays as traders continue to digest the recent central bank moves and the Omicron variant continues to dominate headlines.

With the stock market having had a great performance this year and concerns surrounding the pandemic rising at the same time, many investors might find themselves tempted to take some profits ahead of the year-end. The FX market should remain fairly busy as traders try to figure out which direction various central banks are heading following last week´s series of meetings. Meanwhile, the Omicron uncertainty will keep oil traders on their toes.

 

Omicron concerns

While much of the initial panic has faded, Omicron continues to be one of the main themes traders are talking about; with Netherlands going back into a full lockdown, the UK contemplating new measures and various EU countries imposing new travel restrictions within the bloc, it is hard to ignore. Experts are still analyzing whether Omicron is more or less dangerous than previous variants, but what’s already clear is that it’s highly transmissible and could force more countries to return into a semi, or even full lockdown.

This would weigh on the economic outlook and depress market sentiment further. With the information we have now on COVID-19, a market crash like 2020 is unlikely to happen, but the latest wave could certainly increase downward pressure on the stock market, with the technology sector potentially being hit the hardest given that markets are also facing the prospect of a hawkish Federal Reserve.

The USTECH index is already facing pressure and another test of the important 15,550 support level seems likely. A clear break below it could add to the negative momentum and pave the way for a deeper correction towards at least 15,000 points.

 

The short-term outlook for European stocks turned bleaker too. The recovery in the GER30 was short-lived, and a break below the 61.8% Fibonacci of the September-November rally would signal that losses could extend to 14,800 points in the near-term.

 

Inflation in the spotlight

The key takeaway from last week´s series of central bank meetings is that the spotlight is now clearly on inflation. The Federal Reserve recently announced it will drop the term “transitory” to describe rising inflation, and the ECB and Bank of England both sounded more hawkish at their latest meeting, with the latter surprising markets with a rate hike.

Market participants will therefore increasingly shift their focus on inflation data. However, the pandemic will play an important factor here too. Central banks currently don’t see the Omicron variant as a major threat and continue to march towards policy normalization.

 

GBP – Risk of dovish repricing

However, if the COVID-19 situation gets out of control and countries are forced to reintroduce drastic restrictions, central banks might delay some of their measures. The Bank of England currently seems on track for another rate hike in February, but if the UK decides to go into another lockdown, this is unlikely to happen.

COVID-19 developments will likely determine the course for the British Pound in the short-term. The post-BoE rally is already fading and the risk for a dovish repricing is high. This will keep GBP/USD under pressure and the odds that we will see another test of the 1.3160-70 support area in the coming weeks are good.

 

Oil under pressure

Fears that new restrictions could hit fuel demand put USOIL under renewed pressure, with the consolidation set to end soon. A break below $69.15 support could send USOIL tumbling towards $65, with $62.20 the next major bear target after that. The Daily RSI is not signaling oversold conditions yet.

 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.


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