e have been noting in the past few weeks that attention in financial markets has mostly shifted away from the
ongoing pandemic and back towards expectations for monetary policy. While this remains largely the case, the
sharp increase in infection levels seen around the globe due to the delta variant has put a lid on risk appetite
and caused investors to once again favour the safe-haven currencies. A host of regions are currently
experiencing new waves of infection, notably in much of southeast Asia, parts of Europe, and the US, raising
concerns that fresh restrictions may be needed in order to halt the virus’ spread.

For the most part, the vaccines have proved highly effective in limiting hospitalisation and deaths in those
areas experiencing rising contagion levels. The UK is a prime example, with the country’s impressive
vaccination programme allowing for a near total removal of all lockdown measures on Monday, despite a surge
in new cases. Somewhat counterintuitively, ‘Freedom Day’ has, however, been accompanied by losses in
sterling so far this week, with the currency slipping below the 1.37 level versus the US dollar and its weakest
position since the start of February. The removal of restrictions is clearly a positive for the UK economy, but
investors are wary that the surge in new cases will inevitably lead to a fresh wave in deaths and a reimposition
of lockdown measures at some point later in the year.

Indeed, these concerns are being shared in just about every corner of the globe at the moment, particularly in
those areas that have lagged behind in vaccinations. The delta variant, now the dominant strain worldwide, has
led to a rapid rise in caseloads in much of Asia, particularly the likes of Indonesia and Thailand. Both countries have so far only vaccinated around one-fifth of their population and have been forced to impose strict
lockdowns in an attempt to limit fatalities. Investors are clearly concerned about the economic repercussions of
these fresh restrictions and have subsequently piled into the safe-haven Swiss franc and Japanese yen – the
two best performers in the G10 in the past month.

There’s not too much macroeconomic data out this week, but the market will be keeping close tabs on
Thursday’s European Central Bank policy meeting. With virus cases rising globally again, we’re unlikely to get
word on a tapering in the bank’s QE programme. We may, however, hear more on the bank’s new inflation
target announced last week. Any suggestion that this will allow for an inflation overshoot and slower policy
response could trigger a bout of weakness in the euro towards the end of the week.