Euro Forex Market Strengthens Despite Risk Aversion

• Flight to Safety as COVID Pressure Intensifies
• Fed Policy Measures in Focus
• Wall Street Sell-Off Gathers Momentum

The shortened trading week has not been short on drama in the forex market and others. The major news coming out of the Thanksgiving break is the detection of a new coronavirus variant in South Africa. This is being described as one of concern that may well be able to evade current vaccines. These developments have been reflected across markets in widespread risk aversion. This has not stopped to Euro from recovering somewhat as it now trades above 1.125 after finding some demand as a safe haven. The US Dollar Index is also on the decline as the Fed policy divergence from the ECB comes into focus.

Variant of Concern Drives Demand

In a slow data week for those forex trading, the detection of a new and potentially highly transmissible coronavirus variant has been the key force behind a move to safety and risk-aversion across the market. Despite this, the US Dollar has faced heavy selling pressure with the US 10-Year treasury yielding tumbling. The key bond yield has dropped almost 7% on a day-to-day basis. 

The sell-off in the Dollar does not indicate it has lost its position as one of the most important safe havens, but it does show that traders are lacking confidence in the current position of the USD against other major forex currencies like the Euro. Against other minor currencies, the Dollar remains very strong. 

Fed Hawkishness Contributing to Downturn

Forex brokers note several key factors in the Friday sell-off of the Dollar. The dip in bond yields is chief among them. Also at play though is the Fed monetary policy. While Jerome Powell remained extremely supportive throughout the pandemic, the Fed has been moving slowly toward a more hawkish outlook. This has at times come at the behest of many policymakers who thought it was not before time that measures were tightened. 

This view may now appear short-lived and will almost certainly be subject to a U-turn on the latest developments around COVID-19. At this moment, it would appear that the divergence in economic policy between the Fed, and the ECB with their more dovish stance, is driving demand back to the common currency in Europe. Steps that the US may take to address this gap will almost certainly include shelving any rate hike plans.

Key Markets Plunge on Wall Street

The stock market is set to reopen from Thanksgiving break for a busy half-day in the face of mounting negative pressure. Futures in the Dow Jones were down more than 800 points at the time of writing, while the other major indices look set to follow the lead of Asian and European markets which both sold off strongly.

Besides the new COVID-19 variant, there are a host of other issues for markets to deal with. These include the persistent inflation concerns as well as supply chain issues ahead of the holiday season. Overall, the opening bell will see a disappointing start to what is a traditionally strong period for stocks.