Forex Today: Middle East tensions keep investors on edge

Here is what you need to know on Monday, September 7:

Financial markets cling to a cautious stance at the beginning of the week as investors assess the latest developments in the Middle East. Stock and bond markets in the United States (US) will be closed in observance of the Labor Day holiday on Monday. The European economic calendar will feature revisions to second-quarter Employment Change and Gross Domestic Product growth data, as well as the Sentix Investors Confidence for September.

The data from the US showed on Friday that Nonfarm Payrolls rose by 162K in August. This reading followed July's increase of 21K and beat the market expectation of 56K by a wide margin. Additionally, the Unemployment Rate remained unchanged at 4.1% in this period, even though the Labor Force Participation Rate increased to 61.6% from 61.4%. Following the upbeat labor market data, the US Dollar (USD) gathered strength against its rivals, while the CME FedWatch Tool's probability of a 25 basis points Federal Reserve (Fed) rate hike at the upcoming policy meeting climbed to 60% from about 50% before the release. In the European morning on Monday, the USD Index holds steady, slightly above 99.00.

US Dollar underperforms as equities tighten inverse correlation

Analysts at ING argue that, given “high energy prices and an above-consensus August NFP reading,” the Dollar “should really be doing better than it is.” They suggest the currency’s muted performance “probably owes to the still constructive investment environment, where global equity markets, including emerging markets, continue to perform well.” ING notes that, among the various relationships they track, “the inverse correlation between global equities and the Dollar seems to be the strongest right now – far higher than the Dollar's link to oil prices.”

Over the weekend, the US military attacked three Iran-linked oil tankers, reportedly disabling two and destryoing a third in the Gulf of Oman. In response, Iran targeted three US-affiliated vessels in addition to three oil tankers attempting to pass through the Strait of Hormuz. Meanwhile, Tehran said that they will declare a restricted zone near the Strait of Hormuz and unveil the new shipping route agreed on with Oman "in the coming days." After rising about 8% in the previous week, the barrel of West Texas Intermediate push higher to start the new week and it was last seen gaining nearly 1% on the day at $90.00.

Strait of Hormuz tensions stoke energy security fears

Deutsche Bank’s Jim Reid and team note that the Iran conflict over the weekend saw “a tit-for-tat escalation targeting commercial shipping in and around the Gulf,” with multiple tanker incidents reported. Citing Reuters and other major news agencies, they highlight that “several tanker incidents and maritime attacks heightened concerns about the security of energy supplies moving through the Strait of Hormuz,” as both sides traded accusations over responsibility for the disruptions.

Gold (XAU/USD) lost about 1% on Friday and snapped a two-day winning streak. As tensions in the Middle East remain high, XAU/USD stays on the back foot on Monday and was last seen losing about 0.7% on the day near $4,400.

Following Friday's choppy action, EUR/USD stays relatively quiet in the early European session and fluctuates in a narrow band above 1.1600.

AUDUSD gathers bullish momentum to start the week and trades at its highest level since mid-May above 0.7200.

USD/JPY edges lower and trades near 155.50 after losing about 2.5% in the previous week.

GBP/USD holds steady above 1.3500 in the European morning on Monday.