ase numbers across the continent have been surging higher in the past few days, leading to the reintroduction of containment measures and calls for governments to do more. New daily cases of the virus have now surpassed their initial peaks in both Spain and France. The UK is also experiencing a worrisome uptrend in rates of infection that chief scientific office Sir Patrick Vallance warned yesterday could lead to 50,000 new cases a day should no additional measures be taken. While much of this increase in cases has to do with greater testing, the rate of infection has jumped, with authorities concerned that this could very quickly translate into more widespread contagion and a rise in deaths.

It is clear that in many countries in Europe it is now not a matter of ‘if’ new restrictions will be introduced, but when and to what extent. Another strict lockdown has been put in place in Madrid, with many cities in France also announcing a tightening of measures over the weekend. UK Prime Minister Boris Johnson is also expected to announce new nationwide measures in the UK later today, including the early closure of hospitality venues and work from home orders.

The big fear for markets is that these new measures curtail the impressive rebound witnessed in the global economy in the past few months. As they did during the onset of the pandemic, investors reacted by selling higher risk currencies (notably EM ones) and flocking to the safe-havens. The euro and sterling both sold-off yesterday – over one percent versus the dollar during London trading, with the pound extending its losses this morning. Both currencies look likely to come under further selling pressure in the next few days should case numbers continue to trend higher and local governments unveil further measures to halt the virus’ spread.

Lagarde states ECB ‘attentive’ to euro appreciation

As one would expect, the prospect of fresh lockdown measures in Europe led to an outperformance in the US dollar on Monday. The US has had a torrid time with the virus in the past two or three months, although at present the trend in new cases is a downward one, providing investors with some comfort. The sharp move lower witnessed in equity market and general ‘risk off’ mode is good news for the greenback, which tends to rally during such periods of uncertainty given its safe-haven status.

Aside from news out of Europe, this week’s focus in the markets will be on the business activity PMIs and a number of speeches from central bank officials. ECB President Christine Lagarde kicked things off yesterday, raising concerns about the unevenness of the Euro Area’s economic recovery and the availability of more stimulus. Critically, she also appeared to change tune somewhat regarding the bank’s view on the euro, stating that the ECB was ‘attentive to the euro’s appreciation’, having earlier in the month appeared to take a relaxed view on the currency. Her comments provided further reason for investors to ditch the euro, which is now trading around its lowest level versus the dollar since early to mid-August.

Attention is now likely to shift to FOMC chair Jerome Powell, who will be testifying to Congress in the next two days.