CAPITALDIGEST, MARKET REVIEW, 27 JUNE 2022

MONDAY 20/6/2022 – FOREX-EURO EDGES HIGHER WITH FOCUS ON ECB, DOLLAR RETREATS The euro rose on Monday as markets focused on European Central Bank tools to fight fragmentation in the currency bloc, shrugging off the risk of political gridlock in France for now after President Emmanuel Macron lost an absolute majority in a parliamentary election. Macron’s Ensemble alliance secured the most seats in the National Assembly but fell well short of the absolute majority needed to control parliament, final results showed. Analysts and traders looked past the election result to focus instead on the ECB’s attempts to contain borrowing costs in the bloc’s south and the global monetary policy outlook. Even though a Macron presidency and majority in parliament would be very positive for euro zone cooperation and so forth, it’s more for the long term, it’s not something that affects markets here and now, said Ingvild Borgen Gjerde, FX analyst at DNB Markets. There’s two things that are very important to the euro: What sort of anti-fragmentation tool the ECB can come up with, and the outlook for monetary policy. TUESDAY 21/6/2022 – STERLING RISES AS BOE’S PILL SEES FURTHER RATE RISES AHEAD The pound rose against the U.S. dollar on Tuesday as hawkish comments from Bank of England policymakers continued to support the currency, with an equity rally also helping risk-sensitive sterling. After a three-week losing streak versus the dollar, the British pound rose 0.5% to $1.2310, moving away from a March 2020 low of $1.1934 touched last week. Against the euro, sterling edged 0.1% lower at 85.92 pence, after touching a 13-month low of 87.21 pence versus the single currency last week. BoE chief economist Huw Pill said on Tuesday the central bank would need to raise interest rates further in the near future to tackle surging inflation. A day earlier, BoE Monetary Policy Committee member Catherine Mann, who voted unsuccessfully for a half-point increase in interest rates last week, said that the BoE should raise rates faster than it has done so far because the pound’s weakness was adding to inflation pressures in Britain. Markets are pricing in 184.50 basis points of BoE interest rates hikes by December. [IRPR] The BoE raised its benchmark interest rate by a quarter point to 1.25% on June 16 and said it was ready to act “forcefully” if needed to stamp out dangers posed by inflation. WEDNESDAY 22/6/2022 – STERLING RETREATS AS UK INFLATION HITS NEW 40-YEAR HIGH The British pound pulled back on Wednesday after data showed UK consumer inflation hit a new 40-year high, cementing bets for more Bank of England interest rate hikes in the coming months. Soaring food prices pushed consumer inflation to 9.1%, the highest rate out of the Group of Seven countries and underlining the severity of the cost-of-living crunch. The figure was in line with market expectations and following its release money markets continued to fully price in a 25 basis point (bps) BoE rate hike in August. The odds of a 50 bps move stayed above 60% but fell from around 74%. BOEWATCH “The latest temperature check of the UK economy shows the mercury rising again, with no end yet in sight to the feverish pace of price rises,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown. “The Bank of England has already forecast that inflation will hit 11% by the autumn, and it’s steadily creeping towards that ugly marker sooner rather than later,” she added. In morning trading in London, sterling GBP=D3 fell against a broadly stronger U.S. dollar and was down 0.7% at $1.2910 following two days of gains. Versus the euro EURGBP=D3, the pound fell 0.4% to 86.18 pence. THURSDAY 23/6/2022 – EURO SINKS AFTER BLEAK MANUFACTURING, SERVICES DATA; U.S. DOLLAR RISES The euro slid across the board on Thursday as weaker-than-expected German and French PMI data showed that the euro zone economy is struggling to gain traction, prompting traders to trim bets on big rate-hike moves from the European Central Bank. The dollar, on the other hand, rose against a major currency basket, as risk appetite soured, with safe-haven U.S. Treasuries in demand amid rising recession prospects. [US/] Higher prices in the euro zone meant demand for manufactured goods fell in June at the fastest rate since May 2020 at the height of the coronavirus pandemic. The S&P Global’s headline factory Purchasing Managers’ Index (PMI) fell to a near two- year low of 52.0 from 54.6. “The (PMI) manufacturing/services ratio tends to be a good barometer for pro-cyclical currencies. The ratio has sharply dropped relative to the U.S.,” said Mazen Issa, senior FX strategist in a research note. “This dynamic is typically consistent with further U.S. dollar resilience. This could be bolstered as recession fears mount.” Following the data, money markets priced in about 30 basis points (bps) of ECB rate hikes in July compared to 34 bps on Monday. Traders also trimmed expectations of how much the ECB will hike rates by the end of 2022 to 161 bps, compared to 176 bps on Monday. FRIDAY 24/6/2022 – DOLLAR STUMBLES AS MARKETS RETHINK INTEREST RATE PATH The U.S. dollar slipped on Friday and was heading for its first weekly decline this month as traders dialled down bets on where interest rates may peak and brought forward their views on the timing of rate cuts to counter a possible recession. A significant factor this week has been the fall in oil and commodity prices, which has eased inflation fears and allowed equity markets to rebound. This has eroded the safe-haven bid that has been boosting the dollar against major currencies. By 1045 GMT, the dollar index , which measures the greenback against six major currencies, slipped 0.2% at 104.22. That reversed a 0.2% rise on Thursday, mostly driven by a euro decline after weak business activity data reduced bets for European Central Bank tightening. The dollar, up 9% this year, has lost some of its shine since investors started betting the Fed could slow the rate-tightening pace following another 75 basis-point increase in July. They now see rates peaking next March around 3.5% and falling by nearly 20 bps by July 2023 read more .