Jackson Hole in focus, as delta strain challenges policy decisions

Although not a game changer yet, the RBNZ policy announcement showed last week that the spread of the delta virus strain could bring some rescheduling in monetary policy plans, and therefore some exciting volatility in FX markets. Policymakers postponed a widely expected 25 bps rate hike for later in the year as a handful of new cases was enough to prompt a snap lockdown given the low vaccination rates in New Zealand.

How and when the Fed will proceed with its bond tapering schedule is a more interesting topic for markets and the eagerly awaited Jackson Hole symposium due on Aug. 26-28 could provide some insight this week ahead of the September FOMC meeting. Fed speakers have reflected a divided central bank so far and even the virtual form of the Jackson Hole event suggests that Jerome Powell could wisely avoid any firm commitment to taper despite the high vaccinations in the US and the low hospitalization rates.

Risk-on mood in play for now

Until then, however, traders could enjoy some risk-on taking and today’s pullback in the traditional safe-haven currencies such as the yen and Swiss franc is somewhat reflecting that. Dollar/yen has picked up steam to top slightly above the 110.00 level today, while dollar/franc managed to quickly return above the 50-day simple moving average despite the slide to 0.9139 earlier in the day.

In European currencies, the euro saw little damage from the slight miss in the flash Markit PMI readings, which revealed a moderate slowdown in business activities in August amid the ongoing staff and material shortages. Yet, the overall picture is that expansion remains robust in the euro area and the growth outlook for Q3 is still promising, despite the rising infection cases in key economies such as Germany.

Likewise, the pound was little changed following the unexpected drop in the flash services Markit/CIPS PMI reading, but perhaps speculations that the BoE could take steps towards tightening later in the year continue to support the currency, helping it to steal some ground against the euro today. Meanwhile, euro/dollar was trading moderately up at 1.1724 and pound/dollar higher at 1.3682 at the time of writing.

US flash Markit PMIs and home sales are the next highlight on the calendar at 13:45 GMT and 14:00 GMT respectively, though given the muted reaction in European PMIs, a similarly lackluster response cannot be ruled out.

In risk-sensitive currencies, the aussie and the kiwi are the best performers of the day, gaining around 1.0% against the Japanese yen and recovering significant ground against the US dollar after last week’s freefall. The loonie is the next winner, also benefiting from the sharp rebound in oil prices.

Stock indices recover; gold gains bullish momentum

Turning to equities, European stock indices followed their Asian counterparts higher, with energy and consumer cyclicals driving the gains in the pan-European STOXX 600 after last week’s slowdown. Wall Street is also set to join the recovery in stocks according to US futures.

Gold came under the spotlight after the break above the key resistance of $1,789 today. The next challenge could come around $1,833 if the US dollar continues to weaken.