CAPITALDIGEST, MARKET REVIEW, 07 JUNE 2021.

MONDAY 31/5/2021 – DOLLAR SET FOR SECOND CONSECUTIVE MONTHLY LOSS VS EURO AND POUND The dollar came under pressure on Monday and was heading for its second consecutive monthly loss against the euro and the pound, as traders assessed the impact of a surge in U.S. inflation before monthly jobs data later this week. With London and New York markets closed for a holiday, the dollar index of major currencies fell 0.1% to 90.044 at 1350 GMT On Friday, data showing a key measure of U.S. inflation at a 29-year high briefly boosted the dollar to a two-week high. The euro was flat at $1.2195, off Friday’s low of $1.2133. The British pound edged 0.1% lower at $1.4173 . In holiday-thinned trade, investors weighed the impact on U.S. assets of rising price pressures and a dovish Fed. Despite rising inflation, markets don’t expect a rate hike well into the back end of 2022. The core PCE price index vaulted 3.1% on Friday, the largest annual gain since July 1992, due to a recovery from the pandemic and various supply disruptions. read more The market considers current inflation levels in the U.S. to be transitional. Next year’s U.S. inflation will remain at 2.5%, Ulrich Leuchtmann, Commerzbank’s head of FX and commodity research wrote in a note. “That does not make it any easier pricing USD,” he said. “Until we have more clarity the dollar is likely to have found a good balance at current levels”. Speculators increased their bets against the dollar last week with U.S. dollar short positions hitting a 2-1/2 month high. The Chinese yuan hit a three-year high against the dollar before falling back following a chorus of warnings from Chinese officials against speculative bets on the currency. The offshore yuan changed hands at 6.3698 per dollar after touching overnight its highest since May 2018 of 6.3553 per dollar . In volatile cryptocurrencies, bitcoin was 2.6% higher at $36,604 . Ether rose 5.8% to $2,528. The main event of the week will be U.S. payrolls on Friday with median forecasts at 650,000 but the outcome is uncertain following April’s shockingly weak 266,000 gain.   TUESDAY 1/6/2021 – DOLLAR EDGES UP ON MANUFACTURING DATA AFTER INITIAL SOFTNESS The dollar edged higher on Tuesday against a basket of peer currencies after U.S. manufacturing data showed a stronger-than-expected pickup in activity, even as labor shortages and a lack of raw materials weighed on production. The Institute for Supply Management (ISM) said its index of U.S. manufacturing activity rose in May as pent-up demand amid a reopening economy boosted orders. The dollar initially traded lower on the report, in which ISM said manufacturing’s growth potential continued to be hampered by worker absenteeism and temporary shutdowns because of shortages of parts and labor. The report suggests that supply issues in the manufacturing sector are having an impact on the economy as a whole, said Kathy Lien, managing director at BK Asset Management. “It’s also telling us that the momentum that we saw in the beginning of the second quarter could be beginning to slow.” The dollar index crept up 0.35% to 89.822, but was well off Friday’s high of 90.447, when a measure of U.S. inflation closely watched by the Federal Reserve posted its biggest annual rise since 1992. The market bias is generally toward a softer dollar, said Vassili Serebriakov, FX and macro strategist at UBS. “The global recovery outside of the U.S. that was lagging in the first quarter because of the slow pace of vaccinations has now picked up, particularly in places like the euro zone and the UK,” he said of recent dollar weakness. Hawkish signals from the central banks of some G10 countries, including Canada, Norway and New Zealand, have also added pressure to the greenback, he said. Britain’s pound touched a three-year high of $1.425 during the Asian session, helped by remarks from a Bank of England policymaker last week pointing to a rate hike next year or sooner. The euro ticked up 0.05% to $1.2305, following data that showed euro zone inflation surged past the European Central Bank’s target in May.”The next quarter’s worth of inflation data is completely riddled with base effects and other temporary factors, so it’s very hard for markets and policymakers to strip out the signal from that noise,” said Simon Harvey, FX analyst at Monex Europe.   WEDNESDAY 2/6/2021 – DOLLAR LITTLE CHANGED AS TRADERS SEEK DIRECTION FROM DATA The dollar was nearly flat on Wednesday in choppy trading, after backing off of an almost five-month trough versus major peers, as traders waited for employment data later in the week to paint a clearer picture of the state of the U.S. economic recovery. The dollar index , which measures the greenback against six rival currencies, was up 0.001% at 89.907 at 2:34 p.m. ET, after trading in a range of 89.856 and 90.247. “We’re basically treading water, I think, until nonfarm payrolls,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management referring to the jobs report for May due on Friday. The previous jobs report, for April, came in much weaker than expected, sending the dollar sharply lower. Then earlier this week, manufacturing data showed that while activity spiked due to pent-up demand amid the reopening from COVID-19 shutdowns, labor shortages actually hampered the sector’s growth potential “It’s basically showing that a huge amount of the recovery trade is baked into the cake at this point and the whole recovery curve may be a lot slower than people anticipate,” Schlossberg said of the data. Another weak nonfarm payroll report would put pressure on Treasury yields, which in turn would weigh on the greenback, he said. The euro edged 0.01% lower against the dollar to $1.2215 after pulling back from near a multi month top overnight, when it touched $1.22545. Producer prices in the euro zone rose more than expected in April, boosted by a surge in energy costs, data showed. But the European Central Bank, which wants to keep consumer price growth close to 2% over the medium term, said that while inflation may temporarily rise above its target this year, anemic wage growth will likely keep it in check for years to come. read more Sterling rose 0.15% to $1.4167, after easing off a three-year high of $1.4250 reached on Tuesday. Elsewhere, the Canadian dollar fell 0.22% to C$1.2065 per greenback after rallying to a fresh six-year peak of C$1.2077 overnight as oil prices rose.   THURSDAY 3/6/2021 – DOLLAR CLIMBS TO THREE-WEEK PEAK IN WAKE OF STRONG U.S. DATA The dollar rose to a three-week high on Thursday, bolstered by stronger-than-expected U.S. jobs data that suggested an improving labor market and reinforced signs that the world’s largest economy was on its way to recovery from the COVID-19 pandemic. The greenback, which was already on solid footing ahead of reports on jobless claims and private payrolls, climbed to three-week peaks against the euro and two-month highs versus the yen. U.S. private payrolls increased by 978,000 jobs in May, the ADP National Employment Report showed, the biggest increase since June 2020. Economists polled by Reuters had forecast private payrolls would increase by 650,000 jobs. At the same time, U.S. initial jobless claims dropped below 400,000 last week for the first time since the pandemic started more than a year ago. “You have to give the U.S. dollar merit because the economy behind it seems to be coming out of the pandemic mode and now indicators are giving us signs of clear momentum,” said Juan Perez, FX strategist and trader at Tempus Inc in Washington. Traders also awaited U.S. non farm payrolls report for May, due on Friday, which could set the tone at the Federal Reserve meeting this month. The Wall Street economists’ consensus forecast for U.S. non-farm payrolls was for 650,000 new U.S. jobs last month. “The state of the U.S. labor market remains more uncertain and volatile than usual as it emerges from the unprecedented disruption of the COVID pandemic,” Matt Weller, global head of market research at FOREX.com and City Index, said in a research note. “The month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much stock into any forecasts,” Weller added. In afternoon trading, the dollar index, which measures the greenback against a basket of six currencies, rose 0.7% to 90.5040. It hit a three-week high of 90.554 and found strong support around the 89.946 mark in recent sessions after falling 2% in April and a further 1.6% in May. The euro, meanwhile, fell 0.7% against the dollar to $1.2123 after earlier sliding to three-week low of $1.2118. Against the yen, the dollar gained 0.6% to 110.245 yen. Earlier, the greenback advanced to two-month highs of 110.315 yen.   FRIDAY 4/6/2021 – STERLING STEADIES VS. DOLLAR, SET FOR FIRST WEEKLY LOSS IN FIVE Sterling steadied against the dollar on Friday, making up some of its previous day’s losses although the currency was set for its first week of losses in five due to a broadly strengthening dollar over the past week. A string of strong economic data releases from the United States has boosted the dollar index – which measures the greenback against a basket of currencies – this week to its highest level since mid-May. The gains for the buck come as investors expect the Federal Reserve may respond to the economy heating up and move towards tightening policy sooner than expected. The pound, which is the second best-performing G10 currency against the dollar year-to-date, has also suffered in recent days on worries that a new coronavirus variant spreading across Britain may affect plans to continue reopening the economy. The government will review plans on June 14 to fully open the economy. Sterling has been among the top-performing G10 currencies this year, at one point in the lead, as bets for a quick reopening of Britain’s economy on the back of the country’s vaccination programme. Speculator positioning is still directionally net “long” the pound, which means that the market is betting on future gains for the currency against the dollar. Strategists at ING remained broadly positive on sterling’s prospects despite the newsflow. “We doubt the decision on 14 June whether to fully open up the UK economy will have a material impact on the GBP outlook,” they said in a note to clients. “We feel there is good momentum behind the economy right now – enough to support the BoE’s (Bank of England’s) reasonably bullish set of forecasts and probably maintain expectations that the BoE could tighten before the Fed in 2H22.” By 0805 GMT, sterling was 0.2% higher to the dollar at $1.4117 and set for a weekly loss of 0.4%. It was 0.3% lower to the euro at 85.79 pence, with a weekly gain of 0.3% to the single currency