Markets Remain Cautious Amid Delta Fears

By Lukman Otunuga, Senior Research Analyst at FXTM —

It may be a relatively quiet week for Nigerian markets due to the absence of Tier 1 economic reports. Nevertheless, the developments outside of Nigeria could impact sentiment ahead of the country’s inflation report next week. 

In the commodities arenas, oil prices remain pressured by rising Covid-19 cases, particularly in China. As travel curbs in Asia raise concerns over the outlook for fuel demand and the dollar appreciates on Fed taper expectations, this may result in lower oil prices. Given how a handsome chunk of Nigeria’s export earnings and government revenues are from crude sales, this is an external risk that continues to impact Nigeria’s economic outlook.

In other news….

Asian shares kicked off Tuesday on a mixed note as persistent concerns over the spread of the Delta variant hampered risk sentiment. Commodity markets stabilised after Monday’s brutal selloff, while the dollar held overnight gains, appreciating against most G10 currencies. European markets are expected to open slightly lower with the lack of appetite for risk finding its way to Wall Street this afternoon according to US futures.

The negative developments revolving around Covid-19 have certainly left investors on edge with caution likely to remain the name of the game over the next few days. Nevertheless, the week ahead promises to be eventful and potentially volatile thanks to key economic data including the US CPI report and speeches from numerous Fed members.

Speaking of central bank officials, Federal Reserve Bank of Atlanta President Raphael Bostic said on Monday that the Fed could start tapering in the final quarter of 2021 amid strong job gains. Although Richmond Fed Thomas Barkin said that the economy has made progress, he believed that there was still some room for improvement in the labour market. Both Bostic and Barkin are voters this year on the Federal Open Market Committee (FOMC).

Dollar King of the castle?

The dollar remained firm on Tuesday morning after last Friday’s blockbuster US jobs report boosted expectations over the Federal Reserve tapering sooner than expected. Rising bond yields and hawkish comments from Atlanta Fed’s Bostic have supported the upside, with the Dollar Index (DXY) trading around 93.00 as of writing. The next few days could see increased volatility thanks to the numerous speeches from Federal Reserve officials and the widely anticipated US inflation report.

Headline CPI is expected to print at 5.3% year-over-year while core CPI is forecast to come in at 4.3%. The monthly reading is expected to drop to 0.5% in July from the 0.9% seen in June and core CPI is projected to print 0.4%, down from the 0.9% in the previous month. Further signs of rising inflationary pressures could instill dollar bulls with a renewed sense of confidence as expectations intensify over the Federal Reserve shifting its policy outlook. On the flip side, if inflation cools this may reduce some pressure on the Fed to act, potentially sending the dollar lower.

There are also a couple of Fed members scheduled to speak this week which could spark more dollar volatility. Cleveland Fed President Loretta Mester will steal the show today while Atlanta Fed President Bostic and Kansas City Fed President Esther George are due to speak on Wednesday.

Taking a look at the technical picture, the Dollar Index is turning bullish on the daily charts with the first key level of interest at 93.19. A breakout above this point may open the doors to 93.44 – its highest level in 2021.

Commodity spotlight – Gold 

What a terrible way to kick off the trading week!

Gold collapsed like a house of cards yesterday, cutting through multiple support levels like a hot knife through butter thanks to last Friday’s strong jobs data. As expectations grow over the Federal Reserve tightening monetary policy sooner than anticipated, investors offloaded the precious metal, sending prices to levels not seen in five months.

Although the precious metal has edged higher today as bulls desperately struggle to nurse the deep wounds inflicted from the brutal selloff, gold remains heavily bearish on the daily charts. It will be interesting to see how the pending US inflation data influences prices. Looking at the technical picture, sustained weakness below $1760 may result in a decline back towards $1700 and below. Alternatively, a breakout above $1760 could trigger a move towards $1792 and $1800.