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MONDAY 1/11/2021 – POUND SLIPS AS GROWTH WORRIES COMPLICATE BOE RATE DECISION The pound slipped on Monday, touching its lowest in more than two weeks versus the dollar and euro, pressured by uncertainty over the Bank of England’s policy stance and an escalating post-Brexit spat with France over fish. Robust German and U.S. inflation last week caused an aggressive re-pricing of interest rate bets in those markets. While two Bank of England rate rises are expected by year-end, concerns about UK economic growth are preventing the currency from benefiting fully from rate expectations and surging gilt yields. A weekly T-bill auction fetched an average yield of 0.216773%, compared to 0.135% at last week’s sale. “FX investors have become more concerned about the inflation backdrop in the context of hawkish shifts by numerous central banks. This has, in turn, reduced risk appetite levels and the extent of upward pressure on sterling/dollar,” Stephen Gallo, head of European FX strategy at BMO Capital markets, said. That meant “BoE hawkishness is unlikely to translate directly into pound appreciation versus the dollar in the current environment”, he added.   TUESDAY 2/11/2021 – DOLLAR FIRMS AS FED POLICY MEETING GETS UNDERWAY The dollar firmed slightly on Tuesday as the U.S. Federal Reserve kicked off its two-day policy meeting where it was expected to announce it will begin tapering its massive asset purchases put in place at the start of the COVID-19 pandemic. Investors in recent weeks have priced in a wave of tightening from central banks as they bet policymakers are sufficiently concerned about rising inflation to end pandemic-era levels of easing. The Reserve Bank of Australia (RBA) on Tuesday sounded a more dovish tone than investors had anticipated, in the first of several central bank meetings this week, sending the Aussie to it’s biggest one-day loss since Sept. 29. The Fed will announce its policy decision on Wednesday, and the Bank of England will do so on Thursday. “The theme of inflation getting out of control and forcing central banks into action is unfolding,” said Edward Moya, a senior market analyst at Oanda. The dollar index =USD , which measures the greenback against a basket of peer currencies, was up 0.19% at 94.106. The market has fully priced in the Fed’s expected tapering announcement, and will be looking for any clues as to when the central bank will begin raising rates. “It’s going to be interesting because we’ll have to see if we get any pushback from the Fed, given how the market pricing has become a bit aggressive in anticipating multiple rate increases next year,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.   WEDNESDAY 3/11/2021 – DOLLAR DIPS AFTER FED CONFIRMS BEGINNING OF TAPER The dollar eased on Wednesday after the U.S. Federal Reserve said it would begin unwinding its pandemic-era stimulus, but held to its belief that high inflation would prove “transitory” and likely not require a rapid rise in interest rates. The Fed announced a $15 billion monthly cut to its $120 billion in monthly purchases of Treasuries and mortgage-backed securities, but did little to signal when it may begin the next phase of policy “normalization” by raising interest rates. The dollar index softened after the Fed statement, hitting a session low before reversing some of the losses and was last down 0.045% at 94.068, still within reach of its 2021 peak of 94.563 hit last month. The initial sell-off in the dollar after the Fed announcement was likely profit-taking, said Scott Petruska, chief currency strategist at Silicon Valley Bank. “The market was extremely long dollars going into this and they still are,” he said. Over the rest of the quarter, the dollar will be supported by relatively higher U.S. yields, the Fed showing an eagerness to stop inflation and admitting to some extent that inflation may not be as transitory as they initially thought, and as a safe haven, he said. The Fed announcement follows meetings of the Reserve Bank of Australia on Tuesday and the European Central Bank last Wednesday, both of which pushed back against market pricing of tighter policy. The Bank of England meets on Thursday.   THURSDAY 4/11/2021 – STERLING SLIDES 1.5% AFTER BOE FAILS TO DELIVER EXPECTED RATE HIKE Sterling posted its biggest one day fall in more than 18 months on Thursday after the Bank of England left its main interest rate unchanged having previously signalled it could raise it, casting doubts over the bank’s communication. Seven of the nine members of the BoE’s Monetary Policy Committee voted to hold off lifting the Bank Rate from its all-time low of 0.1% so they could assess the impact on unemployment levels of the recent end to the government’s pandemic job-protection furlough scheme. BoE Governor Andrew Bailey had last month stressed the need to prevent inflation – running above the bank’s 2% target – from becoming permanently embedded, while fellow policymaker Michael Saunders said households needed to brace for “significantly earlier” interest rate rises. But in the end, the BoE dashed investors’ expectations for a rate hike to 0.25%, sending sterling down 1.53% versus the dollar to $1.3472 in its biggest daily drop since March 2020. It was down more than 7 cents from a June peak of $1.42. “In the speeches that they’ve made, they haven’t pushed back against those (hike) expectations and they waited to today to do it. So I think that does raise some questions around communications from them,” said Dean Turner, economist at UBS Global Wealth Management.   FRIDAY 5/11/2021 – STERLING EXTENDS POST-BOE LOSSES, HITS FIVE-WEEK LOW Sterling fell to five-week lows in early trading on Friday, extending its losses after the Bank of England surprised the market by leaving interest rates unchanged on Thursday. Seven of the nine members of the BoE’s Monetary Policy Committee voted to keep the main interest rate at its all-time low of 0.1%, resulting in sterling’s biggest daily fall in more than 18 months. Policymakers had previously signalled the rate could be raised: Governor Andrew Bailey last month stressed the need to prevent inflation — running above the bank’s 2% target — from becoming permanently embedded, while fellow policymaker Michael Saunders said households needed to brace for “significantly earlier” interest rate rises. Ulrich Leuchtmann, head of FX and commodity research at Commerzbank, said in a client note that Bailey had “allowed the market to run in the wrong direction”, adding that “deteriorated communication” would make the bank’s tools less effective in future. At 0926 GMT on Friday, sterling was down 0.4% against the dollar at $1.3449, having earlier hit $1.3439, its lowest since Oct 1. Versus the euro, it was down around 0.3% at 85.825 pence per euro, having earlier in the session reached 85.9, also its weakest since Oct. 1.

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