CAPITALDIGEST

MONDAY 18/7/2022- DOLLAR DIPS AS RATE HIKE BETS EASE The U.S. dollar eased against a basket of currencies on Monday, retreating from the two-decade high hit last week, as traders pared bets on how aggressive the Federal Reserve will be in raising rates at its meeting later this month. A modest rebound in investors’ appetite for riskier assets also dented demand for the safe haven currency. Federal Reserve officials signalled Friday they will likely stick with a 75-basis-point interest rate increase at their July 26-27 meeting, though a recent high inflation reading could still warrant larger increases than anticipated later in the year. Traders in futures contracts tied to the Fed’s short-term federal funds policy rate, who had been leaning toward a full-percentage-point rise in interest rates, shifted their bets firmly in favor of a 0.75-percentage-point increase at the upcoming meeting. “(It’s) a clear reversal of that pricing from last week after the UMich 5-year inflation expectation figure faded, and after (Fed governor Christopher) Waller cast significant doubt on a larger hike,” said Michael Brown, head of market intelligence at Caxton in London. TUESDAY 19/7/2022 – DOLLAR EASES AS ECB RATE HIKE HOPES BOOST EURO The dollar slipped against the euro for a third straight session on Tuesday, following a Reuters story that European Central Bank policymakers are considering raising interest rates by a bigger-than-expected 50 basis points at their meeting on Thursday to tame record-high inflation. The rebound in the euro, which sent it further away from the sub-parity levels of last week, coincided with falling expectations for an aggressive 100 basis points hike from the U.S. Federal Reserve this month, which knocked the dollar. “Currencies continue to revolve around expectations for central bank policy,” said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington “We are now seeing a subtle but meaningful shift in the outlook for trans-Atlantic monetary policy, and that’s proving a good thing for the euro,” Manimbo said. The euro rose to as high as $1.0269 EUR=EBS , up 1.2% on the day and its strongest since July 6 as money markets priced in a 60% chance of a 50 basis points hike on Thursday, up from 25% on Monday. It was last up 0.87% at $1.0229. The euro has rebounded after slipping below $1.0000 last week, its first foray below parity since 2002. WEDNESDAY 20/7/2022 – STERLING SHRUGS OFF UK INFLATION SURGE Sterling steadied against the U.S. dollar and euro on Wednesday after data showed British inflation climbed to its highest rate in 40 years, but only slightly above forecast. The inflation data bolstered bets that the Bank of England will opt to raise interest rates by 50 basis points (bps) next month, but moves for sterling were limited because a 50 bps increase had been priced in, traders said. Sterling EURGBP=D3 edged 0.1% higher against the euro at 85.12 pence by 1504 GMT, having slipped in earlier trade to its lowest level against the single currency since July 7. Sterling was flat against the U.S. dollar GBP=D3 at $1.1992, having climbed to an 11-day high on Tuesday. Bank of England Governor Andrew Bailey said that a 50 bps increase in borrowing costs – unseen in Britain in a quarter of a century – was on the table but not “locked in”. Annual consumer price inflation rose in June to 9.4%, its highest since February 1982. That was up from May’s 9.1% and above the 9.3% consensus in a Reuters poll of economists. THURSDAY 21/7/2022 – FOREX-EURO STRENGTHENS AFTER ECB HIKES FASTER THAN FLAGGED. The euro rose against the U.S. dollar in a choppy session on Thursday, after the European Central Bank (ECB) delivered a 50 basis points rate hike to tame inflation in its first rate increase since 2011. The ECB raised its benchmark deposit rate to 0%, breaking its own guidance for a 25 basis point move as it joined global peers in jacking up borrowing costs. “In firing this resounding opening salvo, the ECB demonstrated flexibility and a willingness to move beyond its own forward guidance, suggesting that monetary policy hawks have gained control on the Governing Council,” said Karl Schamotta, chief market strategist at business payments company Corpay in Toronto. The euro’s initial rally, however, faltered after ECB President Christine Lagarde said the bank was accelerating its exit from negative interest rates but not changing the ultimate point of arrival. FRIDAY 22/7/2022 – STERLING SLIPS AGAINST DOLLAR AS DATA SHOWS ECONOMIC SQUEEZE The pound fell against the dollar on Friday as fresh data fuelled worries about a slowdown in a UK economy that is grappling with inflation at a four-decade high. Britain’s businesses grew at their slowest pace in 17 months in July and inflation pressures eased, according to an industry survey on Friday that might ease pressure on the Bank of England to deliver a big interest rate hike next month. UK retail sales volumes meanwhile fell by 0.1% from May, official data showed, although this was better than the 0.3% monthly fall expected by economists polled by Reuters .Sterling fell 0.4% to $1.1961 but remained above the 28-month low hit last week. And it was set to end the week 0.75% higher – its biggest weekly rise since late May. The pound rose as much as 0.34% to 84.93 pence per euro, recovering from just over two-week lows touched on Thursday after a larger-than-expected rate hike from the European Central Bank boosted the euro. “If you’re looking at sterling, you want to watch how the situation with spreads pans out,” said Stephen Gallo, European Head of FX strategy at BMO Capital Markets. With Italian bonds underperforming the rest of Europe, that is likely to put a ceiling of around 86 pence on the euro/sterling spread, according to Gallo.