Investors are worried about inflation and the highly contagious Delta variant

The economic calendar may not be as a jammed pack this week compared to last but if today’s moves in commodities are a sign, this could be a very active week in the financial markets. 

Gold prices ended the day down 2% after dropping more than 4% at the start of the Asia trade. 

Oil prices settled the day down about the same amount after bouncing off lows.

The U.S dollar was mixed at the start of the NY session but with Treasury yields turning positive, the greenback ending higher against all of the major currencies. These wild intraday swings can be explained by looking at 3 main factors affecting investor appetite and more specifically the outlook for the U.S dollar this month. They are monetary tightening, inflation, and the coronavirus Delta variant. The U.S dollar is strong and commodity prices are weak because Friday’s non-farm payrolls report set the stage for taper talk later this month. 

Members of the Federal Reserve gather in Jackson hole at the end of August for their annual symposium and it is widely believed that they will announce their plans to slow asset purchases in the near future. 

Gold prices crashed for this very reason but recovered because stocks remained under pressure throughout the NY session. Strong job growth drove stocks to record highs on Friday but equities were unable to extend their gains. Investors are worried about inflation and the highly contagious Delta variant. U.S. consumer and producer prices are due for release and while price pressures are expected to rise, the pace of growth could slow. Not only have policymakers said repeatedly that higher inflation is transitory but last month’s increase was the largest in 13 years so deceleration is likely. Lumber prices, which had been trending higher throughout the first 6 months of the year, plummeted in July and are now at their lowest level since 2018. 

Used car prices are also down 2.6% from the previous month according to wholesaler Manheim. Will weaker price growth affect the Fed’s taper plans? Probably not but it could be the excuse for profit-taking in the dollar. 

The greatest worry because it could derail everyone’s plans is the Delta variant. The U.S is averaging more than 100,000 cases a day, the highest since February. Restrictions and masks mandates are returning across the globe with many businesses delaying office reopening plans. Investors are worried that if case growth fails to slow, travel and other social activities will. The sell-off in oil, intraday recovery in gold and decline in stocks is a reflection of the growing anxiety in the markets. We are worried that the markets are underestimating Delta’s ability to crunch demand and cause risk aversion to returning.

Euro

The single currency traded lower as investor morale in the eurozone fell to a three-month low on a sharp drop in expectations due to concerns that new lockdown restrictions could loom in the autumn and beyond. Sentix’s index for the eurozone fell to 22.2 points in August from 29.8 in July. A Reuters poll had pointed to an August reading of 29.0. Overall, the EUR/USD traded with a low of 1.1733 and a high of 1.1767 before closing the day around 1.1735 in the New York session.

Yen

The Japanese Yen fell against the U.S Dollar as a run of strong U.S job figures solidified expectations the U.S Federal Reserve could soon start tapering its massive coronavirus-driven stimulus. The prospect of the Fed's reduced bond-buying pushed down U.S bond prices, lifting their yields and hitting other safe-haven assets. Overall, the USD/JPY traded with a low of 110.00 and a high of 110.33 before closing the day around 110.26 in the U.S session.

British Pound

The British Pound weakened against the dollar though was close to its strongest versus the euro since February 2020, as investors focused on the potential pace of stimulus tapering after the Bank of England meeting and strong U.S jobs data. In recent weeks, sterling has outperformed as COVID-19 cases have fallen and high vaccination rates. Overall, the GBP/USD traded with a low of 1.3839 and a high of 1.3892 before closing the day at 1.3844 in the New York session.

Canadian Dollar

The Canadian Dollar edged higher as the US Senate came close strongest to passing a $1 trillion infrastructure package, but gains were capped by additional pressure on oil prices. Canada sends about 75% of its exports to the United States, including oil. US crude prices were down 3.8% at $65.71 a barrel, extending last week's steep losses. Overall, USD/CAD traded with a low of 1.2528 and a high of 1.2585 before closing the day at 1.2573 in the New York session.

Australian Dollar

The Australian Dollar eased today, weighed down by lower commodity prices, while signs the U.S. Federal Reserve could start tapering bond purchases sooner weighed on risk-sensitive currencies. The Australian dollar dropped as business confidence data also showed recent coronavirus curbs are taking a toll on the economy. Overall, AUD/USD traded with a low of 0.7326 and a high of 0.7362 before closing the day at 0.7331 in the New York session.

Euro-Yen

EUR/JPY is trading below 14, 50 and 100 days moving average. Fast stochastic is giving a bearish tone and MACD is also issuing a bearish stance. The Relative Strength Index is above 43 and lies below the neutral zone. In general, the pair has lost 0.17%.

Sterling-Yen

Currently, GBP/JPY is trading above 14, 50 and 100 days moving average. Fast stochastic is issuing a bearish tone and MACD is also indicating a bearish stance. The Relative Strength Index is above 54 reading and lies below the neutral zone. On the whole, the pair has lost 0.16%.

Aussie-Yen

Currently, the cross is trading below 14, 50 and 100 days moving average. Fast stochastic is giving a bearish tone and MACD is also indicating a bearish stance. The Relative Strength Index is above 43 reading and lies below the neutral region. In general, the pair has lost 0.22%.

Euro-Sterling

This cross is currently trading below 14, 50 and 100 days moving average. Fast stochastic is indicating a bearish one and MACD is issuing a bullish signal. The Relative Strength Index is above 35 and lies below the neutral region. Overall, the pair has lost 0.01%.

Sterling-Swiss

This cross is trading above 14 and below 50, 100 days moving average. Fast stochastic is issuing a bullish stance and MACD is also indicating a bullish tone. The Relative Strength Index is above 60 and lies below the neutral region. In general, the pair has gained 0.34%.

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