North Korea Flicks off the Risk Switch, with the Dollar Under Pressure Once More

With the U.S markets closed for Labour Day today, key stats are limited to UK’s August construction PMI, due for release this morning, as the markets face yet another week of uncertainty over how the U.S will handle the latest nuclear test, said to be the largest yet, with Kim Jong-Un announcing the country’s success in developing a hydrogen bomb.

Sanctions on the North Koreans have clearly fallen short of preventing the development of nuclear weaponry and how the U.S now responds to the latest threat, which quite frankly does bring into question stability within the region and beyond, will be watched closely by the markets.

It may be Labour Day in the U.S, but the United Nations National Security Council are scheduled to be meeting this afternoon in order to discuss fresh sanctions on North Korea, while the U.S will also be considering military options, with U.S Defence Secretary Mattis having said that there are many options available to totally annihilate a country, namely North Korea.

Trump’s response to the latest test continued to be measured, the U.S President suggesting that the U.S would cease all trade with nations doing business with North Korea. The markets are likely to take the latest threat with a pinch of salt when considering the likely impact of such a move on both the U.S and global economies.

China remains the thorn in the side of the U.S administration on North Korea and trade in general and, with the Chinese government having previously warned the U.S on any first move strikes against the North Koreans, how events unfold through the day will certainly have an influence on the financial markets, with Asian markets having seen red this morning, as investors returned to the safe havens of the Yen and gold for what is starting to become a weekly trend of risk off and risk on.

The Dollar was down 0.64% against the Yen at ¥109.54, with the Dollar on the back foot off the back of last week’s weaker than expected labour market figures, the Dollar Spot Index down 0.20% at 92.631, the Spot Index weighed by the EUR, which was up 0.29% at $1.1894.

While we will expect focus to remain on today’s messaging from world leaders on North Korea’s nuclear capabilities, the Pound will at the mercy of the August Construction PMI, due out, with forecasts pointing to an uptick in activity in the sector. Following some relatively weak stats of late, a bounce in manufacturing sector activity last month could see the negative sentiment towards BoE monetary policy ease somewhat, should today’s PMI be positive and tomorrow’s service sector PMI also show an increase in activity mid-way through the 3^rd quarter.

At the time of the report, the Pound was down 0.02% at $1.2948, despite the Dollar being under pressure going into the European session.

It’s all to play for this week, with the ECB interest rate decision and press conference on Thursday being of particular interest, as central banks continue to grapple with Dollar weakness and with number of FOMC member speeches scheduled through the week, Central Bank commentary and Kim Jong-un will most likely be the key drivers for the markets this week.