CAPITALDIGEST, MARKET REVIEW, 02 JANUARY 2022

MONDAY 27/12/2021 – DOLLAR CLIMBS AGAIN AHEAD OF FED AND ECB MEETINGS The U.S. dollar rose again on Tuesday after rebounding from a dip that nearly wiped out its gains from the day before as markets jostled with the different paths major central banks are choosing between fighting inflation or the economic drag of the pandemic. The U.S. dollar index measuring the currency against major peers was up 0.2% at 96.5520 in afternoon trading in New York after having earlier given up much of its Monday gain of 0.3%. The rebound came largely at the euro’s expense as markets digested another report of unexpectedly high U.S. inflation that could push American interest rates much higher and sooner than in Europe. The dollar’s safe-haven appeal also improved as stock indexes fell in the United States and in Europe, and as oil dropped on a prediction that the spreading Omicron variant of the coronavirus will dent global demand. The euro was down more than 0.2% at $1.1256, near a one-week low at 3:39 p.m. ET (2039 GMT).. The contrast between the monetary policies of the U.S. Federal Reserve and the European Central Bank is driving the euro-dollar exchange rate, said Ron Simpson, global currency analyst at Action Economics in Safety Harbor, Florida. The Fed will update its policy on Wednesday and the ECB on Thursday. “It’s like there’s no end in sight to the dovishness for the ECB, whereas it seems like every meeting the Fed is getting a little more hawkish,” said Simpson. The Fed is expected to indicate on Wednesday that it will quicken its taper from bond buying. That would open the door sooner for increases in overnight lending rates.   TUESDAY 28/12/2021 – DOLLAR CLIMBS AGAIN AHEAD OF FED AND ECB MEETINGS The U.S. dollar rose again on Tuesday after rebounding from a dip that nearly wiped out its gains from the day before as markets jostled with the different paths major central banks are choosing between fighting inflation or the economic drag of the pandemic. The U.S. dollar index measuring the currency against major peers =USD was up 0.2% at 96.5520 in afternoon trading in New York after having earlier given up much of its Monday gain of 0.3%. The rebound came largely at the euro’s expense as markets digested another report of unexpectedly high U.S. inflation that could push American interest rates much higher and sooner than in Europe. The dollar’s safe-haven appeal also improved as stock indexes fell in the United States and in Europe, and as oil dropped on a prediction that the spreading Omicron variant of the coronavirus will dent global demand. The euro was down more than 0.2% at $1.1256, near a one-week low at 3:39 p.m. ET (2039 GMT). EUR=EBS . The contrast between the monetary policies of the U.S. Federal Reserve and the European Central Bank is driving the euro-dollar exchange rate, said Ron Simpson, global currency analyst at Action Economics in Safety Harbor, Florida. The Fed will update its policy on Wednesday and the ECB on Thursday. “It’s like there’s no end in sight to the dovishness for the ECB, whereas it seems like every meeting the Fed is getting a little more hawkish,” said Simpson. The Fed is expected to indicate on Wednesday that it will quicken its taper from bond buying. That would open the door sooner for increases in overnight lending rates. The dollar’s gain on Tuesday was likely given an extra lift by covering of dollar-short positions after the inflation report and ahead of the two central bank meetings, he added. “I don’t think it was so much a matter of initial fresh, long-dollar positions.”   WEDNESDAY 29/12/2021 – STERLING TURNS LOWER BEFORE FED DECISION The British pound’s early gains fizzled on Wednesday as investors moved to the sidelines before a Federal Reserve statement that might signal a more hawkish policy shift, potentially boosting the dollar. Some analysts expect the Federal Reserve to announce that it will move more quickly to end its pandemic-era bond purchases, a precursor to raising interest rates. Money markets currently expect the Fed to raise rates at least twice in 2022. Against a broadly strong dollar, sterling GBP=D3 edged 0.1% lower at $1.3220 after being up as much as 0.4% earlier on higher-than-expected inflation data before a Bank of England policy meeting on Thursday. Markets on Wednesday were assigning more than a 60% probability of a 15 bps interest rate increase by British policymakers, up from 50% on Tuesday. But the emergence of the Omicron variant of the coronavirus may force the British central bank to hold off from tightening policy. Data released on Wednesday showed British consumer price inflation had surged to its highest in more than 10 years in November, jumping to 5.1% from October’s 4.2%, exceeding all forecasts in a Reuters poll of economists, which had pointed to a rise of 4.7%.   THURSDAY 30/12/2021 – FOREX-DOLLAR STEADIES AFTER FALL TRIGGERED BY CENTRAL BANK MOVES The U.S. dollar steadied on Thursday but was headed toward a second day of losses as markets sorted a raft of central bank policy statements for clues to coming differences in interest rates and support for their economies. The dollar index =USD of major currencies was down 0.4% in afternoon trading in New York after having fallen as much as 0.5% in the morning. Losses came against currencies associated with more risk taking, as well as against the safe-haven Japanese yen and the Swiss franc. Within 24 hours, the dollar index plunged 1.1%, starting from a spike up when the U.S. Federal Reserve posted a new policy statement on Wednesday, down to a low shortly after the European Central Bank and the Bank of England made announcements on Thursday. “What a day,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. The British pound surged as much as 0.8% against the dollar after the Bank of England became the first major central bank to raise interest rates since the beginning of the pandemic. The euro climbed more than 0.5% after the European Central Bank said it would slightly rein in stimulus. The gentle move by the ECB contrasted with the more hawkish tone of the Fed, which said it will end its pandemic-era bond buying in March, paving the way for an expected three interest rate hikes in 2022.   FRIDAY 31/12/2021 – FOREX-DOLLAR STRUGGLES AFTER CENTRAL BANKS SHOW THEIR HANDS The dollar remained under pressure on Friday at the end of a week in which major central banks laid out plans to unwind pandemic-era stimulus, with the Bank of England surprising markets with a rate hike. The different paths they took underlined deep uncertainties about how the fast-spreading Omicron coronavirus variant will hit the global economy, and the central banks’ differing views on an inflation surge that is landing hard in the United States and Britain, but less so in Europe and particularly Japan. After a turbulent week, the dollar index =USDedged up 0.1% on the day at 96.104, but remained near the week’s lows.The euro and sterling edged down after the previous two days’ gains to stand at $1.13160EUR=EBS and $1.32870GBP=D3 respectively. “It seems the Fed pencilling in three hikes for 2022 and (sounding) optimistic about the economic prosperity – even in the face of Omicron – has allowed other central banks the ability to take a more hawkish turn,” Chris Weston, head of research at brokerage Pepperstone, wrote in a report.