Cautious Mood in Holiday-Thinned Trade

Fundamental analysis of Forex market
  • Asia drifts lower despite China support but European shares eye gains
  • Rising virus cases put investors on edge as doubts re-emerge about Omicron impact
  • Commodities pressured, dollar firms, pound advances

Subdued start to final week of 2021

Markets were struggling for direction on Monday in what is the last trading week of the year. The optimism that the Omicron variant will not cause a major setback to the post-pandemic economic progress has been brought into question by the latest surge in new infections in many parts of the world, including the United States.

With headlines of thousands of flight cancellations over the Christmas weekend, it is hard not to be feeling anxious about what the outlook holds for the winter months. However, although the worrying trend in new infections is ringing alarm bells for investors, there is no sense of panic just yet.

Policy hopes may be keeping virus jitters at bay

The Fed’s open-minded approach to rate hikes is probably spurring hopes that should the virus situation deteriorate dramatically, policymakers will ease up on the pace at which they remove stimulus, even as they turn more hawkish on inflation.

There is also some relief after China’s central bank signalled on Saturday that it will be more “proactive” in supporting the economy and promoting growth in the troubled property sector.

Mixed start for stocks

Nevertheless, China’s main indices closed marginally lower as the country reported its highest number of locally transmitted Covid cases since January over the weekend. Most other Asian markets were closed or also in the red, but in Europe, shares turned positive after opening in negative territory.

With the London market closed and not much on the economic agenda, trading is likely to remain muted until Wall Street traders return from their long holiday weekend later in the day. S&P 500 futures were last quoted about 0.1% higher, having set another all-time high last Thursday.

Oil steadier, dollar climbs

In commodities, oil prices followed the slight improvement in the risk tone by moving away from earlier session lows. Brent crude futures were negligibly positive, but WTI futures were still down about 0.2% on the day, weighed by the fresh uncertainty about the US travel industry following the holiday disruptions.

Gold was unable to move past the $1,810 resistance, slipping to around $1,805/oz as the US dollar edged up.

The dollar index climbed above 96.20 as the euro and yen sagged. The Japanese safe-haven currency was weaker across the board, hinting at a modest risk-on tone. However, the risk-sensitive aussie, kiwi and loonie were all struggling against the greenback on Monday, with the New Zealand dollar down the most.

Pound bucks the trend, but only just

The pound was the only major currency that managed to rise against the mighty dollar, though it appears to have stumbled once again at the $1.34 barrier. Cable has been bolstered lately by the early indications that Omicron leads to fewer hospitalizations than the other variants.

British Prime Minister Boris Johnson has so far refused to bring England into line with the other UK nations by imposing tougher restrictions, even as daily infections top 100,000. Many investors are now looking at the UK as a case study for the Omicron outbreak to see whether vaccines will be enough to stave off a big surge in hospitalizations.