CAPITALDIGEST MARKET REVIEW. 02 AUGUST 2021

MONDAY 26/7/2021 – DOLLAR EDGES LOWER AHEAD OF FED, CRYPTOCURRENCIES JUMP The dollar fell against a basket of other currencies on Monday as investor attention turned to this week’s US Federal Reserve meeting, while cryptocurrency prices hit their highest levels in weeks. Saudi Riyal, Yuan, Turkish Lira, Pound, US Dollar, Euro and Jordanian Dinar banknotes are seen in this illustration taken on January 6, 2020. REUTERS/Dado Ruvic/Illustration/Files. The dollar index, which measures the currency against six major peers, slipped 0.38% to 92.536 under pressure from the euro and yen, but was still close to last week’s 3-1/2-month high of 93.194. The euro rose 0.4% to $1.1815. German business morale fell unexpectedly in July due to supply chain concerns and rising coronavirus infections, an Ifo Institute survey showed on Monday. The yen rose 0.4% to 110.11 yen per dollar. Sterling rose against the dollar and the euro as the coronavirus spread in the UK. [GBP/] The greenback has risen nearly 4% since May 25 as the recovery in the US economy strengthened the outlook for the Fed to begin asset purchases earlier this year. “With the dollar, you have a huge rally,” said Mazen Issa, senior forex strategist at TD Securities. “On a short-term cross-asset valuation basis, it actually looks a bit rich against most of the G10, particularly against currencies that have more rigid central bank pricing.” The Norwegian crown was up 0.45% against the greenback, while the Canadian dollar was up 0.23% The Fed begins a two-day policy meeting on Tuesday, followed by a press conference by Chair Jerome Powell on Wednesday, where investors will listen to any comment on whether the central bank’s tapering of asset purchases begins. TUESDAY 27/7/2021 – DOLLAR EDGES LOWER AS INVESTORS AWAIT FED MEETING OUTCOME The U.S. dollar edged lower against a basket of peer currencies on Tuesday as investors awaited the outcome of this week’s two-day Federal Reserve policy meeting for any signals as to when the central bank will begin tapering its asset purchases. The greenback was 0.263% lower at 92.362 at 2:15 p.m. ET, but still within striking distance of its 3-1/2 month high of 93.19 hit on July 21. The U.S. currency has risen broadly for more than a month on expectations that as the economic recovery gains steam, the Fed will begin to taper its monetary support to keep inflation in check. But the rise in COVID-19 Delta variant cases may cloud the outlook. “The dollar has had a nice summer surge and I think the event risk that the Fed poses has been enough for dollar bulls to take some chips off the table,” said Joe Manimbo, senior market analyst at Western Union Business Solutions. The Fed began its two-day meeting on Tuesday, to be followed by a press conference by Chair Jerome Powell on Wednesday. “I think he’s just going to signal to markets that they’ve been discussing the size of the taper, they’re discussing how to taper, but they’re still in somewhat of a wait-and-see mode, given where we are in the recovery,” said Edward Moya, senior market analyst at OANDA. “So, they’re going to try to punt it, but I think there will be some hawkishness.” Data on Tuesday showed that U.S. consumer confidence hovered at a 17-month high in July, suggesting the economy maintained its strong growth clip at the start of the third quarter.   WEDNESDAY 28/7/2021 – STERLING HOLDS FIRM AFTER UK COVID-19 INFECTIONS DROP Sterling held firm in early London trading on Wednesday, close to a 13-day high against the dollar despite a broader tone of risk aversion in currency markets ahead of a U.S. Federal Reserve meeting. Caution ahead of the Fed meeting later in the session pushed the dollar index higher and mostly saw riskier currencies lose out, with a fall in Chinese equity markets also contributing to the “risk-off” moves. But the pound was an outlier, mostly holding on to its recent gains. It saw a sudden surge on Tuesday around the time at which daily foreign exchange benchmarks are calculated. At 0808 GMT on Wednesday, the pound was at $1.3869, close to its highest in 13 days. It was steady against the euro, having briefly strengthened to 0.84995 earlier in the session – crossing the key psychological 0.85 level for the first time since April. Analysts attributed the pound’s gains to COVID-19 cases in Britain declining over the last seven days, although British Prime Minister Boris Johnson advised against drawing conclusions from the data, saying it was too early to assess whether there was a definite trend. Sentiment was also lifted by an expected lessening of travel restrictions. The decline in infections “has very much put a dent into fears that had been growing that UK growth in H2 was going to be less than previously expected”, said Stuart Cole, head macro economist at Equiti Capital. “This sentiment had been weighing on sterling and as it has dissipated, so the pound has started to claw back some of its lost ground.” Most lockdown restrictions in England were lifted on July 19. Speculators went net short on the pound for the first time since December 2020 in the week up to last Tuesday, CFTC data showed on Friday. “Sterling is the best performing G10 currency so far this week, as it detached from global risk appetite dynamics and may have been buoyed by a slowdown in UK Covid-19 cases, which is raising hopes that the government’s decision to lift almost all restrictions may prove to be a sustainable approach,” wrote ING FX strategists in a note to clients.   THURSDAY 29/7/2021 – DOLLAR AT LOWEST IN A MONTH AFTER FED KNOCK; U.S. DATA DISAPPOINTS The dollar fell to a one-month low on Thursday, a day after the U.S. Federal Reserve said the job market still had “some ground to cover” before it would be time to ease monetary stimulus, taking the steam out of a monthlong rally by the greenback. The dollar index, which measures the greenback against a basket of six other currencies, was down 0.383% at 91.905, its lowest since June 29. The euro gained 0.35% against the dollar, to 1.1885. “The dollar’s reign over the euro appears over as the Fed appears nowhere near tapering as the economy slowly makes its way to achieving substantial progress in the labor market,” said Edward Moya, senior market analyst for the Americas at OANDA. The index, which is still up 1.6% since the Fed’s June meeting, after a hawkish shift from the U.S. central bank, found little support from U.S. gross domestic product numbers released on Thursday. Data showed that while the U.S. economy grew solidly in the second quarter, boosted by massive government aid, growth fell short of economists’ expectations. GDP increased at a 6.5% annualised rate last quarter, the Commerce Department said on Thursday, well below the 8.5% rate economists polled by Reuters had forecast. “With the dollar already under pressure today as the risk environment stabilises and markets embrace the dovish rhetoric from Fed Chair (Jerome) Powell yesterday, the near-2-percentage-point miss in Q2 GDP did little to relieve the greenback,” said Simon Harvey, senior FX market analyst at Monex Europe. U.S. Treasury yields trended lower after Wednesday’s Fed statement, with inflation-adjusted real yields tumbling to a new low, weighing on the U.S. currency.. “Should the yield curve continue to slowly steepen with risk appetite remaining in place, dollar bearishness could accelerate in the coming weeks,” said OANDA’s Moya.       FRIDAY 30/7/2021 – STERLING HEADED FOR BEST WEEK IN 2021 Sterling hovered close to a one-month high versus the dollar on Friday and was on course for its strongest week since December ahead of a Bank of England meeting next week. A drop in COVID-19 cases, although they are still high, and the reopening of the British economy have fuelled a rebound in the pound – it has added around 3% in less than a fortnight to hit close to $1.40. Broad dollar weakness, which was exacerbated by a dovish Federal Reserve meeting this week, has also helped sterling. By 0745 GMT on Friday, the pound was marginally higher at $1.3965, slightly below the one-month high of $1.3982 reached on Thursday. The pound has gained 1.6% against the dollar this week – making it one of the top performing major currencies. Against the euro, sterling was a little weaker at 85.18 pence, although it remains close to its strongest level versus the single currency since early April. The BoE, which meets on Thursday, is expected to keep its foot firmly pressed on the stimulus pedal. But there is growing discussion about the need to begin tapering its bond-buying programme as the economy recovers. Two BoE policymakers have expressed such a view recently “Markets appear to be rebuilding some GBP long positions ahead of next week’s Bank of England meeting, with sentiment on the currency that has recently been buoyed by a contraction in COVID-19 cases in the UK despite most restrictions having now been lifted,” ING analysts said in a research note.