EUR

The euro has been one of the better performers in the G10 space this morning as the risk-off session sees higher beta currencies such as AUD and NZD come under selling pressure vs. the US dollar and the euro. The euro may be more vulnerable to downside risks in the short term, however after last week’s dovish European Central Bank meeting failed to provide markets with reasons to speculate on policy normalisation.

Meanwhile, domestic virus headlines may weigh on the euro in the near term with cases continuing to rise and extended restrictions loom. Dutch people travelling into Germany are now required to quarantine after the surge in Dutch cases, while Germany’s chief of staff warned on Sunday he fears the German daily case count in Germany could soar to 100,000 in about two months unless a significantly higher proportion of the population chooses to get vaccinated.

USD

A continued risk-off market mood kept the dollar bid on Friday although dollar pairs traded in range-bound. Global Covid concerns and US-China trade tensions continue to mark top news stories while investors favour safer assets. JPY trades as the firmest currency in the G10 FX space this morning, closely followed by USD and EUR.

This week’s main market event will be the Federal Reserve’s monetary policy decision on Wednesday where the pace of the Fed’s bond-buying programme will be in focus as Chair Powell balances the downside risks from ongoing virus uncertainties with upside risks to inflation. Although commentary from Fed members regarding policy normalisation has been mixed so far, Powell himself has been clear on his view on inflation, as he has stated multiple times inflation will shoot up before simmering down, although an exact timeline of how transitory price pressures will develop has been left blank.

Downside risks have arguably increased over the last few months given the developments around the Delta variant. Top US infectious disease expert Anthony Fauci warned that the US is moving in the “wrong direction” in combating the new virus wave as vaccinations slow, and stated a booster shot may be needed especially for the most vulnerable.

GBP

The main area of concern for the pound remains on the domestic health backdrop, with the UK providing the template for the global economy on what life looks like once vaccinations have reached levels to protect wide parts of the population. News headlines over the weekend focused on the potential removal of China’s CGN from all future power projects, putting the £20bn Sizewell C nuclear plant in Suffolk and the proposed Bradwell-on-Sea developments at risk. The news comes amid bubbling tensions between China and Western governments.