Risk Aversion on Virus Variant, King Dollar, Brexit

Fundamental analysis of Forex market

A new faster strain of COVID-19 is triggering risk aversion across the board. Thin market conditions are making today’s selloff look more like panic selling. US stocks are down sharply despite a breakthrough from Congress on a USD900 billion pandemic stimulus package. Congressional leaders reached a compromised deal that will provide aid to small businesses, direct payments to most Americans and funding for vaccine execution. Yesterday, Congress passed a one-day continuing resolution to allow both chambers to vote on the relief bill later today.

UK Covid mutation weighs on equity markets

Risk appetite did not stand a chance as the virus rages on in Europe and across California. Virus cases in the UK are being attributed to a mutation of the virus that allows it to spread faster. The new virus strain will likely force tighter restrictions across Europe. The Euro Stoxx 50, FTSE 100, and DAX are all under pressure, dropping at least 2%. The situation in California, the state that has the biggest share of the US economy at over 14%, is out of control. The last several weeks of limited restrictive measures now have the death toll spiraling higher. California’s ICU capacity has fallen to low single digits and hospital staff is stretched thin. The short-term outlook is very bleak, but optimism is still high that by the fall things will closely be back to normal. Some investors are eyeing every dip, but that doesn’t mean Wall Street shouldn’t expect 3-5% weakness before trading is done for the year.

Brexit impasse continues

The British pound tumbled after a new COVID strain, that might be 70% more transmissible, is forcing much of the UK to have harsher lockdowns. The fast-spreading variant of the coronavirus might not be more lethal or resistant to vaccines. The new strain surprised markets and will likely mean tighter restrictions will last a lot longer. Adding to selling pressure was the EU and UK inability to reach a Brexit trade deal over the weekend. Access to British fishing waters and limits on state subsidies for businesses remain the sticking points.

US dollar surges

All the major news headlines apparently have justified this Monday morning selloff which has made the dollar king again. The greenback is having its best day since March as risk aversion runs wild after the UK found a new COVID-19 strain, Brexit trade talks missed another deadline, and as investors sell the news that Congress was able to reach an agreement over a second stimulus package. This should not be the beginning of a new trend for the dollar, but the FX market was ripe for a dollar rebound. Thin conditions could allow for the dollar to rally a couple more percentage points.