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CAPITALDIGEST MARKET REVIEW, 03/01/2023

 STERLING EDGES UP AGAINST EURO AND DOLLAR, SET FOR THIRD STRAIGHT WEEKLY DROP The British pound edged up against the U.S. dollar and euro on Friday in thin trading conditions, but was still set for its third straight weekly drop against both currencies. The pound was last up 0.2% versus the dollar at $1.2055. It hit its lowest level in over three weeks on Thursday at $1.1993. Against the euro, the pound was up 0.1% at 87.94 pence, having hit its weakest level against the single currency since October 12 on Thursday. Victoria Scholar, head of investment at interactive investor, said the pound was unwinding some of its move from the earlier part of the week, with attention turning to U.S. personal consumption expenditures (PCE) data due at 1330 GMT. “The U.S. dollar is acting cautiously ahead of the latest inflation reading as traders await clues about the Federal Reserve’s next move,” Scholar said. The Federal Reserve (Fed) and the Bank of England (BoE) both raised rates in December by a smaller clip than previous meetings, although both expect more rate hikes will be needed to help bring inflation down to target. Scholar expects the pound to find support if signs grow larger that the Fed’s tightening cycle could be coming to an end. “The pound has already been benefiting from expectations of less hawkish Fed policy since the trough in September with the potential for that uptrend to extend into next year,” Scholar said. DOLLAR FLAT AS INVESTORS DIGEST CHINA’S LOOSENING OF COVID RULES The dollar was flat on Tuesday after China said it would scrap its COVID-19 quarantine rule for inbound travelers – a major step in reopening its borders, even as COVID cases spike. China will stop requiring arriving travelers to go into quarantine starting Jan. 8, the National Health Commission said on Monday. At the same time, Beijing downgraded regulations for managing COVID cases to the lighter Category B from the top-level Category A. The offshore yuan fell 0.13% to $6.9653 per dollar. “We’ve been in a very narrow trading range, and I think with the dollar firming up against the euro and yen, we could see further dollar gains against the Chinese currency,” said Marc Chandler, chief market strategist at Bannockburn Global Forex. Still, investors could be cheered by what some perceive to be “Chinese policymakers’ resolve to full reopening”, said Christopher Wong, a currency strategist at OCBC. “There seems to be no let-up in the pace of relaxing COVID restrictions despite the surge in COVID cases in the mainland.” Elsewhere, the euro rose 0.1% against the dollar to $1.0640. China’s gradual dismantling of its economically-damaging zero-COVID policies may give an additional boost to the euro – which has clawed higher thanks to the European Central Bank taking a much harder line on inflation than investors had expected. FOREX-DOLLAR SLIDES AS TRADERS WEIGH CHINA OUTLOOK, U.S. JOBLESS CLAIMS The dollar slipped on Thursday with investors on edge at the end of the year as initial optimism over China’s reopening fizzled out and as markets processed a readout of U.S. jobless claims. Markets are weighing the impact of China’s rapid loosening of its strict COVID-19 rules with a surge in new infections. “China is one of the keys I think to 2023 and what happens to the global economy,” said Chris Gaffney, president of world markets at TIAA Bank. Following China’s removal of its quarantine rule for inbound travelers from Jan. 8, the United States, Japan, India and other countries said they would require COVID tests for travelers from China. “If they can bounce back from the dramatic slowdowns that we’ve seen, that helps the overall growth on the global scale, but on the other hand, it could also lead to higher energy demand and more demand means higher prices,” said Gaffney. After hitting a one-week high against the yen on Wednesday, which saw the dollar touch 134.40, the greenback hit a session low against the yen on Thursday. The dollar JPY=EBS last fell 1.1% against the yen to 133.005. The dollar also fell against the Swiss franc CHF= to as low as 0.9208, the lowest level since March 31. It was last down 0.71% against the Swiss franc at 0.922. Against a basket of currencies, the U.S. dollar index =USD fell 0.479% to 103.840, having climbed 0.18% in the previous session.10/1/2023 – U.S. DOLLAR DOWN, STILL SET FOR BEST YEAR SINCE 2015 The dollar was on track to post its best year since 2015 on Friday in the last trading day of a year dominated by Federal Reserve rate hikes and fears of a sharp slowdown in global growth. As 2022 draws to a close, the dollar was set to notch a 7.9% annual gain against a basket of currencies – its biggest annual jump in seven years. But the dollar has pared gains in recent weeks as investors look for signs of when the Fed’s interest-rate-hiking cycle might end. The Fed has raised rates by a total of 425 basis points since March in an attempt to curb surging inflation. With liquidity lower due to holidays, the dollar index was down around 0.433% on the day at 103.530 . “I think everyone is struggling with the question of whether the big problem in 2023 will be weak growth or stubborn inflation,” said Adam Button, chief currency analyst at ForexLive. “If it’s weak growth, the U.S. dollar will fall. If it’s high inflation, then the U.S. dollar will rally.” The euro was up 0.34% on the day to $1.0697 , on pace for a 5.9% annual loss versus the dollar, compared with last year’s 7% drop. A combination of weak euro-zone growth, the war in Ukraine and the Fed’s hawkishness has put the euro under pressure this year. “Higher rates paired with stronger economic growth are helping to pull flows into the euro area, but any of that is at risk, particularly if energy prices do rise again, or the [European Central Bank] starts to turn less hawkish,” said Karl Schamotta, chief market strategist at Corpay. U.S. DOLLAR DOWN, STILL SET FOR BEST YEAR SINCE 2015 The dollar was on track to post its best year since 2015 on Friday in the last trading day of a year dominated by Federal Reserve rate hikes and fears of a sharp slowdown in global growth. As 2022 draws to a close, the dollar was set to notch a 7.9% annual gain against a basket of currencies – its biggest annual jump in seven years. But the dollar has pared gains in recent weeks as investors look for signs of when the Fed’s interest-rate-hiking cycle might end. The Fed has raised rates by a total of 425 basis points since March in an attempt to curb surging inflation. With liquidity lower due to holidays, the dollar index was down around 0.433% on the day at 103.530 . “I think everyone is struggling with the question of whether the big problem in 2023 will be weak growth or stubborn inflation,” said Adam Button, chief currency analyst at ForexLive. “If it’s weak growth, the U.S. dollar will fall. If it’s high inflation, then the U.S. dollar will rally.” The euro was up 0.34% on the day to $1.0697 , on pace for a 5.9% annual loss versus the dollar, compared with last year’s 7% drop. A combination of weak euro-zone growth, the war in Ukraine and the Fed’s hawkishness has put the euro under pressure this year.

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