Geopolitical tensions abate, but safe havens remain poised for further potential gains

The intense, threat-filled rhetoric between North Korea and the US that pulled down equity markets and pushed up safe-haven demand last week toned down a notch over the weekend, putting investors at more ease. Senior US officials, including Secretary of State Rex Tillerson and Secretary of Defense James Mattis have appeared to take on a much more diplomatic and conciliatory stance to North Korea than President Trump has, which gave the markets some confidence that a military/nuclear confrontation may likely be avoided for the time being.

As a result of this perceived decline in geopolitical risk from last week, safe haven assets including gold, the Japanese yen, and Swiss franc initially fell early on Monday. As trading continued through the day, however, gold and the yen pared some of their losses, even as US stocks retained and even extended their initial gains as of around midday.

Despite the apparent lull in market risk perceptions, the fact that safe haven assets continued to remain well-supported suggests that concerns have not entirely abated. Indeed, North Korea’s Liberation Day celebration is slated for Tuesday, and tensions and rhetoric could once again heat up.

In the case of the yen, continued support for the Japanese currency could be readily seen in GBP/JPY. After having pulled back from its early-July highs near key 148.00-area resistance, the site of a rough triple-top pattern, GBP/JPY has continued to drop as the pound has foundered and risk aversion has notched up, generating demand for the yen.

Since that topping pattern, the currency pair has continued to break down below key support areas. Most recently, price has reached down to its 200-day moving average and key support around 142.00. Currently forming what could turn out to be a bearish inverted flag pattern on the daily chart, GBP/JPY could have significantly further to fall, especially as risks emanating from North Korea will unlikely be resolved easily. On the sterling side of the currency pair, this week also features economic risk events for the pound including UK CPI on Tuesday, employment data on Wednesday, and retail sales on Thursday. With any further GBP/JPY breakdown below 142.00-area support and the noted inverted flag pattern, the next major downside target resides around the key 139.00 support level.

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