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CAPITALDIGEST, MARKET REVIEW. 25, APRIL, 2022.

MONDAY 18/4/2022 – FOREX-U.S. dollar touches fresh two-year high on steep Fed hike view The dollar rose to a fresh two-year high on Monday in thin and choppy trading, in line with higher U.S. Treasury yields, as investors braced for multiple half a percentage-point rate hikes from the Federal Reserve. Volume was light on the day with Hong Kong, European, Australian and New Zealand markets closed for Easter Monday. The U.S. rate futures market has priced in a 96% chance of a 50 basis-point tightening at next month’s Fed policy meeting, and about 215 basis points in cumulative rate increases in 2022, providing ample support for the dollar. FEDWATCH The greenback also climbed to a new 20-year peak of 126.98 yen versus the Japanese currency, highlighting the contrast in monetary policy between a hawkish Fed and an ultra-dovish Bank of Japan. The benchmark U.S. 10-year Treasury yield, meanwhile, touched a three-year high of 2.884% US10YT=RR. The dollar index =USD, a gauge of the greenback’s value against six major currencies, surged to 100.86, the highest since April 2020. It was last up 0.3% at 100.77. “There is indeed history that when the Fed plans for hiking and tightening, the buck ends up losing during those cycles, but at the moment there is little in optimism out there that can knock the buck down,” said Juan Perez, director of FX trading at Monex USA in Washington.   TUESDAY 19/4/2022 – POUND SLIPS BELOW $1.30 AS INVESTORS AWAIT BANK OF ENGLAND SIGNAL The pound dropped below $1.30 on Tuesday, falling for a fourth straight day against the dollar amid doubts over the Bank of England’s policy path and increased political uncertainty. Sterling fell 0.2% against the U.S. dollar to $1.29805, well within striking distance of a November 2020 low of $1.2973 hit last week. Against the euro, the pound was 0.3% lower at 83.08 pence , retracing all the gains seen post the European Central Bank decision on Thursday. Even as British yields have extended gains in recent days, investors have become increasingly unsure whether the Bank of England will follow some of its global counterparts in raising interest rates aggressively to curb inflation. Data last week showed British consumer price inflation jumping in March to 7%, its highest in three decades, but money markets have slightly dialled down expectations for how much the BoE will raise interest rates in the rest of the year. Scotiabank analysts, led by chief FX strategist Shaun Osborne, think that BoE rate expectations are still “well overdone”. “GBP remains on the backfoot against the continued climb in US yields and the fact that there is little more that markets can price in this year in terms of BoE hikes,” Scotiabank said.   WEDNESDAY 20/4/2022 – STERLING REBOUNDS AFTER FOUR DAYS OF LOSSES, OVERLOOKS PM’S WOES The British pound climbed against a broadly weak dollar on Wednesday, unruffled by Prime Minister Boris Johnson’s political woes, with attention focused on potential policy signals from the Bank of England (BoE) this week. Gaining after four days of losses, sterling rose 0.4% to $1.30535, moving away from a low hit last week that marked its lowest level since November 2020. Against the euro, the pound was 0.22% lower at 83.155 pence. British lawmakers are due to vote on Thursday on whether Johnson should be referred to parliament’s privileges committee for an inquiry into breaches of lockdown rules, after his apology to parliament on Tuesday. Given the ruling Conservative party’s majority in parliament, the motion is unlikely to pass. That means currency markets are overlooking political uncertainty for now. “Currencies generally dislike political uncertainty, but if Johnson leaves, it will most likely be a change of personnel rather than a change of policy,” said Colin Asher, senior economist at Mizuho. “In this case the short-term implications for growth and inflation are relatively small and hence the impact on sterling will be limited.” Instead, the market focus remained on hints on future rate hikes from the BoE, which has recently softened its language on the need for more increases after raising rates three times since December. Thursday will see key speeches by BoE policymaker Catherine Mann and Governor Andrew Bailey.   THURSDAY 21/4/2022 – STERLING FALLS AGAINST EURO, FLAT VERSUS DOLLAR Sterling fell against a strengthening euro while it was flat versus the dollar. Hawkish comments amplified bets that the European Central Bank would soon hike interest rates, lifting the euro to a one-week high amid expectations French President Emmanuel Macron would win his reelection bid on Sunday. Investors were still focused on the future monetary policy path of the Bank of England, while waiting for more central bank speakers later in the day from Washington. The pound was down 0.2% at 83.21 pence per euro, after hitting its lowest level since April 11 at 83.66 earlier in the session. “MPC members have sounded dovish on interest rates in recent weeks,” Ebury analysts said. However, “the blowout inflation report for March, and a near certainty that the April print will be even higher, suggests that the bank won’t be able to hold the line for much longer.” The BoE last month softened its language on the need for more interest rate increases while stressing downside risks to the economy. BoE monetary policymaker Catherine Mann said on Thursday interest rates would probably have to go up “a little bit” further, and that in some ways Britain’s economy was already suffering from stagflation.   FRIDAY 22/4/2022 – FOREX-EURO EDGES LOWER AFTER ECB COMMENTS; COMMODITY CURRENCIES FALL The euro edged lower on Friday after European Central Bank officials made mixed comments, while expectations of a 50 basis points (bps) rate hike from the Federal Reserve supported the U.S. dollar. ECB President Christine Lagarde provided some dovish signals by saying the central bank might need to cut its growth outlook. This followed ECB dove Luis de Guindos joining a growing number of ECB policymakers in calling for an early end of the Asset Purchase Programme coupled with a rate rise in July. Fed Chair Jerome Powell confirmed a half-point interest rate increase will be on the table when the Federal Reserve meets on May 3-4. The monetary policy outlook is the main subject for forex markets, because rising interest rates boost the value of currencies. To convince the market in the long term, all ECB members have to pull together. There will likely be occasional swings, but these will lead back to USD strength, Moritz Paysen, forex and rate adviser at Berenberg, said in a research note. Euro zone PMI data showing business growth unexpectedly accelerated this month failed to provide immediate further direction to the market.

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