Inflation, Gold And 3 Things Affecting U.S. Dollar

The economic calendar may not be as jammed pack this week compared with last week, but if today’s moves in commodities are a sign, this could be a very active week in the financial markets. 

Gold prices ended the day down 2% after dropping more than 4% at the start of Asian trade. Oil prices settled the day down about the same amount after bouncing off lows. The U.S. dollar was mixed at the start of the New York session, but with Treasury yields turning positive, the greenback ended higher against all of the major currencies. These wild intraday swings can be explained by looking at three main factors affecting investor appetite and, more specifically, the outlook for the U.S. dollar this month. They are monetary tightening, inflation and the Delta coronavirus variant.

The U.S. dollar is strong and commodity prices are weak because Friday’s non-farm payrolls report set the stage for taper talk later this month. Members of the Federal Reserve gather in Jackson Hole at the end of August for their annual symposium, and it is widely believed that they will announce their plans to slow asset purchases in the near future. Gold prices crashed for this very reason but recovered because stocks remained under pressure throughout the New York session. Strong job growth drove stocks to record highs last Friday but equities were unable to extend their gains.

Investors are worried about inflation and the highly contagious Delta variant. U.S. consumer and producer prices are due for release, and while price pressures are expected to rise, the pace of growth could slow. Not only have policy-makers said repeatedly that higher inflation is transitory, but last month’s increase was the largest in 13 years, so deceleration is likely. Lumber prices, which had been trending higher throughout the first six months of the year, plummeted in July and are now at their lowest level since 2018. Used car prices are also down 2.6% from the previous month, according to wholesaler Manheim. Will weaker price growth affect the Fed’s taper plans? Probably not, but it could be the excuse for profit-taking in the U.S. dollar.

The greatest worry – because it could derail everyone’s plans – is the Delta variant. The U.S. is averaging more than 100,000 cases a day, the highest since February. Restrictions and masks mandates are returning across the globe, with many businesses delaying office reopening plans. Investors are worried that if case growth fails to slow, travel and other social activities will. The sell-off in oil, intraday recovery in gold and the decline in stocks are a reflection of the growing anxiety in the markets. We are worried that the markets are underestimating Delta’s ability to crunch demand and cause risk aversion to return. We may already be seeing some signs of that today in the U.S. dollar’s rally. Part of the dollar’s gains can be attributed to good data, but the greenback could also be catching a safe-haven bid.

Aside from U.S. CPI, Tuesday’s German ZEW survey, Thursday’s Q2 UK GDP report and Friday’s New Zealand business PMI index will be numbers to watch.