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Risk aversion hits markets; EURUSD, Gold in spotlight

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By Lukman Otunuga, Senior Research Analyst at FXTM

A wave of risk-off sentiment engulfed markets on Monday after US and European shares tumbled on growing concerns over the Covid-19 Delta variant outbreaks threatening economic recovery.

The sour mood is likely to dish out more punishment to equity markets on Tuesday as investors seek refuge in safe-haven destinations. Given how the outbreaks are being reported from Australia to Indonesia and the United Kingdom, caution is likely to remain the name of the game.

Even though US futures are climbing after the S&P 500 collapsed like a house of cards overnight, the selloff could resume if investors look beyond corporate earnings to focus on global growth fears.

 

‘Freedom Day’ arrives, what next?

Monday was “Freedom Day” in England where all lockdown restrictions were lifted despite the surging Covid-19 infections. While this development can be seen as a step back to some normality, there are concerns over whether this will lead to a reimposition of lockdown measures across the UK.

The economic recovery remains fragile with the Bank of England expecting unemployment to rise as the furlough scheme winds down in September. Surging infections and the uncertainty it presents are the last things the UK economy needs at such a crucial period.

The British Pound has depreciated against most G10 currencies this week, notably the dollar, Swiss franc and yen. Given how GBPUSD closed below the 200-day Simple Moving Average on Monday, the path of least resistance remains south with the next key level of interest at 1.3600.

 

EURUSD under pressure ahead of ECB

The main risk event for the euro this week will be the European Central Bank meeting on Thursday.

Although the ECB is widely expected to leave monetary policy unchanged, this will be the first meeting since the conclusion of the bank’s Strategy Review. This means investors will be looking for any change in the central bank’s forward guidance and potentially a more dovish shift in the policy stance.

Looking at the technical picture, EURUSD remains under pressure on the daily charts. A solid break below 1.1770 could inspire a decline towards 1.1700. Alternatively, a move back above 1.1800 could trigger a rebound towards 1.1860.

 

Gold at mercy of King Dollar

Gold remains at the mercy of an appreciating dollar. However, subdued treasury yields in addition to mounting concerns over surging Covid-19 cases across the world may cushion downside losses.

As the risk-off mood sends investors rushing towards destinations of safety, gold is likely to find some support. Nevertheless, bears are still lingering and may snatch control if prices sink back below the $1800 psychological level.

 

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