- Markets remain optimistic about Omicron, weighing on the dollar, but that may change.
- Speculation about the Fed's hike timing is set to increase with the bank's minutes and the NFP.
- All other factors are only a distraction from these themes.
New year, same factors moving the greenback – the impact of Omicron and Fed speculation.
The most important market-mover is Omicron – the highly contagious COVID-19 variant. After roughly six weeks, we know that it is extremely contagious but causes less severe disease than previous strains such as Delta.
Markets currently see the glass half-full, hoping that this wave would subside as quickly as it rises, and even help people become more protected against other variants of the virus. Optimism is good for stocks and weighs on the safe-haven dollar.
On the other hand, we have already seen how infections among aircrew caused a massive cancellation of flights over the holiday season. Moreover, while a lower percentage of infected people become sick, the sheer number of cases means hospitals could still come under pressure and that could trigger governments to impose restrictions.
Now that the holidays are over, it would be politically easier to impose new curbs. When worries take over, stocks fall and the dollar rises.
The dollar's second market-mover is the long-term one of monetary policy. The Federal Reserve is set to raise interest rates sometime in 2022, but the timing of the first move is still unknown. The hawkish twist from Fed Chair Jerome Powell – who accelerated the tapering process in December – already boosted the greenback in 2021. The main worry for the Fed is that inflation is rising more than anticipated – it is no longer transitory.
Will the Fed raise rates as soon as March, wait until May as markets price, or leave it til June? Hints could come with the Fed's meeting minutes published on Wednesday and also Nonfarm Payrolls on Friday. A strong jobs report – especially one accompanied by a robust increase in wages – could send the dollar higher on expectations for an early move from the Fed. Disappointing data would do the opposite.
Beyond Omicron and Fed speculation, other factors are minor – these include worries about China's Evergrande, tensions between Russia and Ukraine, and commentary by market analysts about the prospects of the global economy. These factors come into play only in the absence of virus or inflation fears.
