Financial markets gripped by geopolitics

September 6, 2017 09:32 AM

Financial markets were firmly gripped by geopolitical risks on Tuesday, as brewing tensions between the United States and North Korea weighed heavily on global sentiment.

Risk aversion is becoming a dominant theme amid escalating North Korean tensions, and the jitters punished Asian stocks during early trading on Wednesday. In Europe, shares ended mostly lower yesterday and have extended losses today, as the cautious mood from Asia encouraged investors to avoid riskier assets. The lack of appetite for risk sent U.S. stocks to their lowest level in almost three weeks on Tuesday, with further downsides on the cards as the mixture of geopolitical tension and political uncertainty sours risk appetite.

The movements observed in stock markets and safe-haven assets suggest that markets have become increasingly sensitive to geopolitical influence. Recent comments from a North Korean diplomat threatening that the country was prepared to deliver ‘gift packages’ to the U.S. is likely to fuel further risk aversion.

Dollar punished by Fed doves
King dollar struggled to hold ground against a basket of major currencies during Wednesday trading session after dovish comments from Federal Reserve Governor Lael Brainard prompted investors to re-evaluate the likelihood of another rate hike this year.

Brainard stated that inflation was “well short” of targets and the central bank should be cautious about tightening policy until policy makers are confident that inflation will rebound. These dovish remarks have effectively trimmed market expectations of a December rate hike, exposing the Greenback to further pain.

As the trading month of September gets underway, dollar weakness is likely to remain a dominant theme; political instability in Washington and fading rate hike expectations will weigh heavily on the currency. From a technical standpoint, the dollar Index is under intense selling pressure on the daily charts. Repeated weakness below 92.00 should encourage a further depreciation towards 90.00.

Commodity spotlight – Gold
The heightened geopolitical risks over North Korea and ongoing concerns about stubbornly low inflation in the United States have supported Gold, with prices trading around $1,340 as of writing.

The yellow metal has found itself back in fashion, with further upside expected as geopolitical tensions and political uncertainty in Washington accelerate the flight to safety. From a technical standpoint, Gold is bullish on the daily charts as there have been consistently higher highs and higher lows. A solid breakout and daily close above $1,340 should open a path higher towards $1,350.

Currency spotlight – EUR/USD
Thursday’s main risk event for the euro will be the highly anticipated European Central Bank meeting, which is expected to conclude with interest rates left unchanged.

The prospects of the European Central Bank tapering QE have heavily supported the euro and, with the current QE program due to end in September, tomorrow’s ECB meeting will be in sharp focus. While markets were widely expecting the central bank to announce the winding down of its QE program this week, the resurgent Euro and the impact it may have on the inflation target may prompt the central bank to wait until October.

From a technical standpoint, the euro/U.S. dollar (EUR/USD) currency pair remains bullish on the daily charts. The breakout above 1.1900 should encourage a further appreciation towards 1.1970 and 1.2000, respectively. In an alternative scenario, repeated weakness below 1.1900 is likely to trigger a selloff towards 1.1770.

About the Author

Lukman Otunuga is an FXTM research analyst