Monex: Concerns about Delta variant weigh on market sentiment

Monex: Concerns about Delta variant weigh on market sentiment

Currency
Corona-virus (06)

This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe.

EUR

The euro opened the week on a stronger note against most currencies this morning as a deterioration in market sentiment following a spike in Covid cases in Asia weighed on commodity-linked currencies like NOK, CAD and AUD and currencies with stronger procyclical features, such as SEK, NZD, while safe haven currencies strengthened against the euro.

EUR/USD fell to multi-day lows after the US dollar made another push higher on the EU equity cash open as stocks were further hit. The main event of this week will be the European Central Bank monetary policy meeting, which comes after the ECB unveiled its new monetary policy strategy this month.

In the new strategy, President Christine Lagarde announced a higher inflation target of a symmetrical 2% from the previous “below but close to 2%”. Lagarde signalled over the weekend that her colleagues at the German Bundesbank unanimously back the strategy, which validates how even the hawkish institution is committed to keeping stimulus elevated throughout the recovery and favours greater flexibility around the new price-stability goal.

September is expected to be a bigger meeting in terms of policy changes, however, Thursday’s policy decision and specifically, the communication around it should set the tone of what policy will look like over the summer and how committed the ECB is to maintain its so far dovish approach.

USD

A modest uptick in US Treasury yields boosted the dollar on Friday before a reversal in yields and a downtick in US equity markets started weighing on the currency. This morning, a clear risk-off market mood kept the dollar buoyed as the Delta variant continues to spread globally, with cases mostly surging in Asia and Europe while there has been an uptick in the US as well.

As a result, the dollar index climbed to levels not seen since April. US Treasury note futures have breached last week’s high, while oil prices fell after the OPEC+ group reached a deal to increase output.

GBP

Sterling is little changed this morning as it trades slightly lower along with the rest of the G10 against the dollar despite all lockdown restrictions being lifted in the UK. The positive news is caveated for markets, however, as the rate of new infections continues to soar in the UK, although it isn’t mapping as directly into hospitalisations and deaths as before due to the introduction of vaccines. The rising case count remains a concern, however, as a deteriorating public health backdrop may result in increased caution with new spending and investment decisions.