CAPITALDIGEST MARKET REVIEW, 05 JUNE 2021

  MONDAY 28/6/2021 – STERLING RISES BUT STILL SET FOR WORST MONTH SINCE SEPTEMBER Sterling rose on Monday as traders brace for the end of the worst month versus the dollar since September, with the focus moving to political risks this week. This month, sterling dropped for the first time since April below $1.38 against a strengthening dollar after the U.S. Federal Reserve surprised markets by signalling it would raise interest rates and end emergency bond-buying sooner than expected. Sterling was one of the worst performing G-10 currencies last week after the Bank of England kept the size of its stimulus programme unchanged and said inflation would surpass 3% as Britain’s economy reopens, but the climb further above its 2% target would only be temporary. But sterling rose 0.4% to $1.3926 versus the dollar at 0855 GMT. Against the euro, the pound rose 0.3% to 85.76 pence. “Historically the price action does tend to suggest a firm sterling into the end of month and quarter,” said Neil Jones, head of FX sales at Mizuho Bank. “My sense is seasonal end of month type sterling demand is in play given value date for spot is 30th June”. Currency strategists at ING said they expected politics to play a role this week, with investors watching a dispute between Britain and the European Union over post-Brexit trade in the British province of Northern Ireland. The current grace period waiving checks on British-made sausages and other chilled meats moving to Northern Ireland is due to end on June 30. Britain has yet to receive a formal response from the EU over its proposal to further extend the grace period, a minister said on Sunday.   TUESDAY 29/6/2021 – STERLING EDGES LOWER VS. DOLLAR, HITS LOWEST IN OVER A WEEK Sterling edged down to its lowest in over a week against the dollar on Tuesday, with the British currency on track for its worst month since September. A broad strengthening in the dollar in recent weeks after a surprise hawkish shift by the U.S. Federal Reserve has brought some volatility back to currency markets, while also toppling sterling from levels near 3-year highs. The fall in the currency has caused a shakeout in speculative bets, although CFTC data still shows the market maintaining a net long position on the pound. Sterling has since traded between $1.38 and $1.40 as investors tread water over uncertainty around the spread of the delta variant of the coronavirus in Britain, which has forced the government to delay the final phase of reopening the economy. Prime Minister Boris Johnson said on Monday that Britain was on course to be able to lift most remaining COVID-19 restrictions on July 19. By 0744 GMT, sterling was 0.14% lower to the dollar at $1.3859, after hitting its lowest since June 21, at $1.3856. The currency was set for a 2.4% loss against the dollar this month. Against the euro, the pound traded flat at 85.92 pence. “Sterling continues to show some resilience to concerning domestic developments,” ING strategists said in a note.   WEDNESDAY 30/6/2021 – DOLLAR HITS 15-MONTH HIGH VS YEN AS U.S. PAYROLLS TEST LOOMS The dollar hit a fresh 15-month high versus the yen and hovered near multi-month peaks against other major peers on Thursday, ahead of a key U.S. jobs report that should offer clues on when the Federal Reserve will start to pare back stimulus. The U.S. currency rose as high as 111.165 yen for the first time since March 26, 2020, before easing back slightly to 111.055. The dollar index , which measures the greenback against six counterparts, held just below a 2 1/2-month top of 92.451 reached Wednesday, edging up on the day to 92.402. The index posted its best month since November 2016 in June, driven by the Fed’s surprise hawkish shift in the middle of that month, when policymakers signalled two interest rate hikes by the end of 2023. Traders are looking to Friday’s U.S. nonfarm payrolls report for confirmation of that outlook, with economists polled by Reuters expecting a gain of 700,000 jobs last month, compared with 559,000 in May, and an unemployment rate of 5.7% versus 5.8% in the previous month. The greenback extended gains Wednesday after data showed U.S. private payrolls increased a greater-than-expected 692,000 jobs in June. “I see the balance of risk skewed to an above-consensus print” for nonfarm payrolls, Chris Weston, head of research at broker Pepperstone in Melbourne, wrote in a note to clients. “A payrolls north of 800k could get U.S. bond yields higher and put a further bid in the USD.” If the euro breaks convincingly below current levels versus the dollar, “this could be a magnet to attract USD flow,” he said, adding “JPY seems universally weak.” The euro edged down to $1.1851 after dipping as low as $1.1845 on Wednesday for the first time since April 6. The benchmark 10-year U.S. Treasury yield continued to edge lower in Asia, slipping to 1.4630% following a three-day decline.   THURSDAY 1/7/2021 – DOLLAR GAINS AHEAD OF U.S. PAYROLLS, SEEN HIGHER SHORT-TERM The dollar hit three-month highs on Thursday but traded within narrow ranges as investors looked to Friday’s U.S. nonfarm payrolls report for clues on whether the Federal Reserve will start to reduce monetary stimulus sooner rather than later. The U.S. dollar index, which measures the greenback against six major counterparts, rose to 92.602 =USD, the highest since early April. It last traded up 0.2% at 92.572. The index in June posted its best monthly performance since November 2016, driven in part by the Federal Open Market Committee’s unexpected hawkish shift at a meeting during the month. Fed forecasts released after the June FOMC meeting penciled in two interest rate hikes by the end of 2023. Against the yen, the dollar hit a 15-month high of 111.640 yen, and was last up 0.4% at 111.560. Increased vaccinations that have led to more robust economic activity have helped the U.S. recovery from the pandemic, prompting expectations the Fed could start exiting its ultra-easy policy. That has provided a lift for the dollar. “The dollar got a justified boost in June based on physical activity taking place across the country because of inoculations,” said Juan Perez, FX strategist and trader at Tempus Inc in Washington. “The rest of the world simply is not looking that safe, that prepared to move forward,” he added Traders are looking to Friday’s U.S. payrolls report for confirmation of the market’s bullish outlook. Economists polled by Reuters expect a gain of 700,000 jobs last month, compared with 559,000 in May, and an unemployment rate of 5.7% versus 5.8% in the previous month.   FRIDAY 2/7/2021 – STERLING PLUMBS TWO-MONTH LOW IN WAKE OF BOE GOVERNOR’S COMMENTS Sterling hit fresh two-month lows against the dollar on Friday, pressured in the wake of dovish comments from the Bank of England’s governor. In his annual Mansion House speech on Thursday, Andrew Bailey said it was important to ensure that the recovery was not undermined by a premature tightening in monetary conditions, as a rise in inflation was likely to be temporary. Bailey’s comments knocked the pound to its lowest since April 16, and the currency hit a fresh low of $1.3745 in morning deals in London. Against the euro, it recovered some ground to trade 0.2% higher at 85.94 pence. “The pound’s recent bout of out-performance faltered yesterday as BoE Governor Bailey said that the BoE should not over-react to the inflation spike,” said ING in a note to clients. “Sterling looks a little vulnerable to a further BoE re-pricing short term and euro-sterling could see a decent rally if resistance break at 0.86.10-15 pence.” ING noted that unlike U.S. interest rate futures markets, sterling markets are in the process of handing back hawkish pricing seen in late June. Money markets were earlier pricing a 10 basis point BoE rate hike in May 2022. Sterling was one of the worst-performing G-10 currencies last week after the BoE kept the size of its stimulus programme unchanged and said inflation would surpass 3%, but that the climb further above its 2% target would be only temporary.