CAPITALDIGEST, MARKET REVIEW. 16 MAY 2022,
MONDAY 9/5/2022 – U.S. DOLLAR TOUCHES 20-YEAR HIGH AS MARKETS SHUN RISK
The U.S. dollar reached a new 20-year high on Monday as risk-off sentiment stemming in part from concerns over the Federal Reserve’s ability to combat high inflation boosted the greenback’s safe-haven appeal. The dollar has risen for five straight weeks as U.S. Treasury yields have climbed on expectations the Fed will be aggressive in attempting to tamp down inflation. On Monday, Minneapolis Fed President Neel Kashkari said the U.S. central bank may not get as much aid from easing supply chains as it is hoping for in helping to cool inflation. Atlanta Fed President Raphael Bostic said he already sees signs of peaking supply pressures and that should give the Fed room to hike at half-percentage-point interest rate increments for the next two to three policy meetings, but nothing bigger. Also contributing to the defensive tone was the ongoing war in Ukraine and concerns about rising COVID-19 cases in China. “Right now, it seems like you have a trifecta of drivers here that are going to keep providing the dollar with solid footing,” said Edward Moya, senior market analyst at Oanda in New York.
TUESDAY 10/5/2022 – STERLING EDGES BACK TOWARDS JUNE 2020 LOW
The British pound edged lower on Tuesday, heading back towards its lowest level in nearly two years on signs that a weakening economy will force the Bank of England to slow its interest-rate hiking cycle. At 1503 GMT, the pound was 0.2% lower against the U.S. dollar at $1.2305, just above its lowest level since June 2020 of $1.2262 reached on Monday. “I think it’s pretty tough to be bullish sterling in the current environment,” said Michael Brown, head of market intelligence at Caxton, citing a dovish BoE, rapidly slowing growth and high inflation. “If you’re asking for a perfect mix for a weaker currency, sterling is pretty much as close as you can get to at the moment,” Brown added. On Thursday, the BoE raised its benchmark interest rate to 1.0% but said it saw the economy shrinking in 2023 and a near 1% fall in gross domestic product in the final quarter of 2022. Markets are currently pricing in a further 106 basis points of tightening from the BoE this year, taking the benchmark rate to just above 2.0%. Further evidence of the worsening growth outlook was seen on Tuesday after two reports showed British consumer spending stuttered in April as the cost-of-living crisis affects consumption.
WEDNESDAY 11/5/2022 – DOLLAR SLIPS AFTER CPI DATA AS FED EXPECTATIONS IN CHECK
The dollar was lower on Wednesday after economic data showed inflation remained high but was unlikely to lead the Federal Reserve to shift to a more aggressive path of monetary policy. The consumer price index rose 0.3% last month, the smallest gain since August, the Labor Department said on Wednesday, versus the 1.2% month-to-month surge in the CPI in March, the largest advance since September 2005. On an annual basis, CPI climbed 8.3%, higher than the 8.1% estimate but below 8.5% the prior month. The data signaled inflation may have peaked but was unlikely to quickly cool and derail the Fed’s current plans to tighten monetary policy. The dollar index =USD , which had touched a four-session low of 103.37 ahead of the report, immediately strengthened to a session high of 104.13 following the data, just below the two-decade high of 104.19 reached on Monday. “Hope springs eternal here but at the end of the day markets are correct in thinking these inflation pressures are ultimately transitory, that we should see a diminishment in supply chain issues and demand as well for the coming months,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. “Essentially to me, the challenge here is inflation expectations are well anchored across the spectrum … ultimately traders will look through this and we will see a bit of a reversal in the trend that we are seeing right now.”
THURSDAY 12/5/2022 – FOREX-DOLLAR HITS TWO-DECADE HIGH, RATTLED INVESTORS PLUMP FOR SAFE HAVEN
The dollar rose to fresh two-decade highs on Thursday as concerns that tighter monetary policies to tame surging inflation will hurt the global economy dampened risk sentiment and drove investors into safe-haven currencies. Data on Wednesday showed U.S. consumer price growth slowed sharply in April, suggesting that inflation had probably peaked, though it was likely to stay hot. The data confirmed expectations for further aggressive hikes in interest rates by the Federal Reserve. Asian stocks fell to an almost two-year low, European shares tumbled and oil prices were down 2%. The dollar index, which measures the greenback’s strength against a basket of six currencies, rose 0.4% to 104.45, after hitting its highest since December 2002 at 104.54. “The U.S. economy remains strong, and inflation is still there. We have little reason to believe that data will prevent the Fed from raising rates and starting its quantitative tightening,” Kamal Sharma, forex strategist at BofA said. Despite increasing expectations of a rate hike in July, the euro remained under pressure on fears that the war in Ukraine and rising energy prices could tip the eurozone into recession later this year. “The dominant theme is not whether the ECB will hike rates in July, which is already priced in, but what is going on in economic activity and how this will spill over into central banks’ reaction function,” Sharma added.
FRIDAY 13/5/2022 – FOREX-EURO FALLS BACK TOWARDS 2017 LOWS ON RUSSIAN ENERGY CRISIS
The euro hovered near its weakest point since early 2017 on Friday after Russian sanctions led to disruptions in gas supplies to Europe, renewing fears about an economic slowdown in the euro zone. The single currency has been battered in recent weeks by a combination of fears for the economy suffering from the fallout of the war in Ukraine, and a huge rally in the U.S. dollar fuelled by bets the Federal Reserve will deliver a series of big interest rate hikes to tame inflation. While investors expect the European Central Bank to lift rates out of negative territory this year, yields in the euro zone will lag the United States by a significant margin. Predictionsfrom investors and analysts that the euro could fall to parity with the dollar are growing louder. Parts of Obamacare GOP will keep, change or repeat. Associated Press. On Friday, the euro ceded earlier gains to drop 0.1% to $1.0373 EUR=EBS, close to the $1.0354 EUR=EBSlevel it hit on Thursday, its lowest since early 2017. The euro is down 1.6% versus the dollar this week.