The US dollar was higher across the board against major pairs. The greenback was able to maintain its momentum even as a brief stock market rally crashed and burned on Monday. The stock sell-off from last week appeared to have receded, only for the market to do a U-turn in mid-session with tech stocks taking heavy hits.
The possibility of more US tariffs aimed at China was one of the factors for the stock market decline, and it also sent investors looking for the safety of the US dollar taking flows away from other safe-havens such as the JPY and gold.
The Bavarian and Hesse elections dealt a heavy blow to the CDU, with German Chancellor stepping down from party leadership and would not seek re-election when her terms end in 2021.
The euro depreciated after the announcement as the EU is facing political headwinds as it negotiates on two fronts. Italian budget talks and Brexit have not progressed as the European Commission would like and sides are too far apart despite rhetoric from leaders.
The dollar was boosted by economic data as the September PCE kept up with August and the core reading is a stronger signal of inflation for the Fed to take into consideration.
Gold lost 0.32 percent on Monday as the US and other riskier assets advanced. US stocks had a volatile session that once again is stoking fears of a correction. A report on an escalation of the US-China trade war and the tech sector underperforming put all three major indices in the red.
Personal consumption expenditures in the US, especially the influential core PCE reading, lifted the US dollar against gold as the rate hike path of the Fed is expected to continue. The Fed has hiked 3 times in 2018 and heavily anticipated to add another interest rate bump in December.
The prospect of higher rates diminished the appeal of the yellow metal, even though gold has reclaimed some of its status as a safe-haven asset.
Investors will keep gold in mind as the rest of the week unfolds with central bank announcements, economic data and geopolitics in the background.
Oil prices fell on Monday. West Texas Intermediate lost 1.33 percent and Brent 0.98 percent as the US dollar came off the blocks to start the week. Russian Energy Minister Alexander Novak signalled over the weekend that production would be higher, despite OPEC concerns about oversupply.
The difference of opinion between Russia and the OPEC put further downward pressure for crude that was already on the back foot as the US dollar appreciated on Monday. Economic data in the US boosted the currency as it continues to validate the monetary tightening policy of the Fed.
There is plenty of chatter around how big of an impact the US sanctions on Iranian exports will have as the market for loopholes to avoid them has been on the rise. If the actual gap caused by lost Iranian exports is not as big as expected it could cause prices to fall even lower.
US weekly inventories are forecasted to show a buildup in stocks, with a potential rise of 3.3 million barrels.
US tariffs against China could also go higher, putting in jeopardy global growth with energy demand falling, if the pre-G20 meeting between Trump and Xi does not bear any meaningful fruit.
The Mexican peso started the week under pressure from strong US fundamentals. The currency fell after the results of a public consultation on an airport construction project that is 30 percent underway by the incoming movement resulted in the elected President saying his administration would cancel the project.
The cancelation filled investors with uncertainty given that the project has been ongoing since 2015 and has more than 70 percent of its funding secured. The currency pair broke through the 20 peso price level even as investors were seeking higher yields and bought emerging market currencies.
The Mexican central bank held rates unchanged on October 4, with one dissenting vote but as US fundamentals keep validating more tightening from the Fed and Mexican politics add to the peso's downward pressure Banxico could be forced to intervene sooner than later.