Another weekend, another development from North Korea and this time on the nuclear weapon front. Kim Jong-un caused further alarm and consternation across the world on Sunday when a hydrogen bomb was detonated deep underground causing an earthquake of magnitude 6.3. World leaders were quick to denounce the test although it seems there isn’t a united view on how best to deal with the increasingly tense situation. President Trump was predictably vocal on Twitter, declaring North Korea actions “hostile and dangerous” and he indicated that military action remained an option; he said ‘we’ll see’ when asked if the US would attack North Korea. China and Russia took a more conciliatory stance saying they were “committed to upholding global peace”. This is another hurdle for markets that have proven themselves resilient to recent tension on the North Korean peninsula. An early selloff in U.S. equity-index futures last Tuesday after North Korea’s launching of a missile over Japan was erased by the close of last week.

The nuclear test overshadowed the U.S. August employment report on Friday. Nonfarm payrolls rose by 156,000, below the median estimate of 180,000 in a Bloomberg survey of economists, and revisions for the prior two months subtracted 41,000 jobs. Unemployment also ticked up and pay growth was soft which, together with the NFP number, paints a less upbeat picture of the labour market than markets had expected. In spite of that, U.S. stocks rose and Treasuries declined as investors chose to focus instead on separate reports that showed American factories ramped up in August to the fastest pace of expansion in six years, while consumer sentiment climbed to a three-month high amid an improving outlook for household finances and the economy.

The day ahead

Looking ahead to the week to come, much of the focus will be on the European Central Bank policy statement and press conference on Thursday lunchtime. Mario Draghi is likely to talk about the euro’s recent appreciation as he gears up to announce QE tapering over the months ahead. While he declined to address the exchange rate last month at his appearance at the Jackson Hole Symposium, 67 percent of economists expect that he will at Thursday’s 13:30 (UK time) press conference. The euro’s 13 percent surge against the dollar this year presents the ECB with a new challenge when they meet this week as the central bank struggles to understand why a strong economy has failed to generate sufficiently sustained inflation. With governors of the various central banks already talking at cross purposes about the currency’s gains, it will now fall on Draghi to take a stand. 

Thought of the day

For many, the first Monday in September marks the end of the long summer holidays. Parents up and down the country will be braving the traffic and bad weather to do the morning drop-offs, while UK politicians return to Parliament and US Congress returns after its break too. It feels the Pound has also been on a holiday of its own, spending the last few weeks marooned in the 1.28s and 1.08s against the dollar and euro. However activity is more than likely to pick up this week where key central bank meetings, escalations in the Korean peninsula and any hints of a leadership challenge to Theresa May could all have varying effects on the currency markets. Speak to the FX dealing desk to find out how you could best manage your FX exposure in what could be a volatile week in the markets: 0800 055 6339.