An air of caution is lingering across the financial markets during early trading on Friday, as investors closely monitor the escalating tensions surrounding the United States and North Korea. The war of words between the two nations is putting investors on high alert and more comments from President Trump overnight has resulted in additional risk-off being seen in the markets.
Money is jumping into safe-havens like gold and the Japanese Yen, while the Korean Won has fallen to its lowest level in a month-after extending its losses to around 2% for the week. After a very quiet start to the week due to the summer season, the second half has been dominated by geopolitics—with the mounting tensions between the United States and North Korea denting risk sentiment, ultimately punishing global stocks.
Asian equity markets tumbled lower on Friday amid the risk aversion, and European stocks are likely to extend losses as uncertainty accelerates the traders’ flight to safety. Wall Street closed sharply lower on Thursday after U.S. President Donald Trump reiterated his warnings to North Korea. Stocks may remain pressured this afternoon, as market players remain hesitant to carry riskier assets ahead of the U.S. inflation data, scheduled for later today.
Yen supported by risk aversion
The Japanese Yen has sharply appreciated against its major trading partners, following the escalation of geopolitical tensions between the United States and North Korea. Money has poured into the Yen as investors search for safe-haven assets following the “fire and fury” comments from U.S. President Donald Trump, earlier in the week.
The Japanese Yen is regularly seen as a trader’s best friend in times of uncertainty, and what we are noticing is a continuation of the same trend.
The Yen gained further ground against the U.S. dollar during trading on Friday, with the U.S. dollar/Japanese yen (USD/JPY) currency pair dipping below 109.00 for the first time since mid-June.
If geopolitical risk and uncertainty continue to strengthen the Yen, USD/JPY bears are likely to have found enough inspiration to conquer the stubborn 109.00 support level. From a technical standpoint, the USD/JPY is heavily bearish on the daily charts, as there have been consistently lower lows and lower highs. A breakdown and daily close below 109.00, may even encourage an eventual depreciation towards 107.50
Commodity Spotlight – Gold
Market jitters from the escalating geopolitical tensions between the U.S. and North Korea have brought gold back into fashion this week, with the yellow metal hitting a fresh two-month high above $1288, during early hours on Friday. In times of uncertainty, investors continue to be attracted to gold and further upside is likely if U.S./North Korean anxiety supports the flight to safety.
Although the metal is currently following a positive trajectory on the daily charts, market players might decide to remain on the sidelines ahead of the U.S. inflation report, released later today. It should be kept in mind that the inflation figures have the ability to impact the prospects of higher U.S. interest rates, and this will possibly have a direct correlation to the value of gold.
From a technical standpoint, gold bulls are back in town and the breakout above $1,280 increases the potential of a further appreciation towards $1,300.
U.S. inflation report in focus
The dollar weakened against a basket of major currencies on Thursday, after U.S. producer prices declined the most in 11 months—falling 0.1% in July, while unemployment claims rose last week.
Today’s main focus and event risk for the U.S. dollar will be the pending inflation report from the United States Federal Reserve, which should offer fresh clues on the pace of monetary tightening. Although the Greenback has maintained its post NFP gains this week, the overall price action suggests that market players are still hesitant to purchase the currency. Investors need more convincing over the possibility of higher U.S. interest rates this year and this should come in the form of rising inflation. With concerns over stubbornly low inflation weighing heavily on the prospect of another U.S. interest rate increase, the pending U.S. CPI data will be in sharp focus. A soft inflation figure below market consensus is likely to quell expectations of higher U.S. interest rates, ultimately pressuring the dollar.