In his speech to the congressional committee, Powell warned of the risks of rising U.S. prices. He noted that the risk of higher inflation had grown and said that it was time to "retire the word temporary in terms of inflation." This is a very significant development, as the Fed has been very reluctant to admit that high price pressures will persist for some time, instead insisting on the word "temporary" to express its view that above-target inflation is only temporary. Powell also said that the FOMC would consider accelerating the pace of tightening in the coming months and that committee members would discuss this at their next meeting on Dec. 14-15.

By contrast, ECB President Christine Lagarde expressed her view at the last central bank meeting in Frankfurt that the sharp rise in inflation in the eurozone was only temporary and that a normalization of the inflation picture could be expected in Q2 2022. The past decades have shown, however, that the European economic development, which follows the U.S. economy with some distance.

Speculators were caught on the wrong foot by Powell's comments. We had assumed that the Fed would announce at its December meeting that it would accelerate the pace of its tapering starting in January. 

Our conviction, and that of market participants, was undoubtedly swayed by the uncertainty surrounding the discovery of the highly mutated Omicron strain of COVID-19. While Powell pointed out that Omicron poses a risk to the outlook, he does not appear to be overly concerned at this time.

As Powell mentioned, we won't know more about the variant for another ten days, when we will hopefully have data on the transmissibility of the virus and the effectiveness of existing vaccines against the mutation.

 Bad news on this front could keep the Fed from tightening monetary policy again later this month, although it currently appears that policymakers are eager to end tapering and start raising rates sooner rather than later. Futures markets are not pricing in the first rate hike until June 2022, although our sense is that the Fed would like to start raising rates before then, assuming no additional constraints such as a lockdown are needed to combat the Omicron variety.

Markets reacted as expected, and the dollar rose more than one percent against the euro and the pound on Tuesday, although most of those gains have since been reversed. While the Fed is clearly concerned about rising inflationary pressures and would ideally end tapering in the first quarter of 2022 and make further rate hikes soon after, the uncertainty surrounding Omicron makes that far from guaranteed. Cases of the highly mutated strain have emerged worldwide, and 20 countries have now reported officially confirmed cases. However, there are reasons for optimism, especially given that cases of the variant so far appear to have resulted in only mild symptoms and no hospitalizations or deaths have been reported among carriers of the strain. The mutation could be anything or nothing to worry about, but until we get more information, there's no way to know for sure. In such an uncertain environment, we continue to favor the safe currencies, which have significantly outperformed most of their peers in recent weeks.