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CAPITALDIGEST MARKET REVIEW, 09/1/2023

DOLLAR CREEPS UP IN SUBDUED START TO NEW YEAR The dollar edged up on Monday, pulling away from recent six-month lows against a basket of major currencies. The US currency has weakened as markets bet a Federal Reserve tightening cycle may be nearing an end. Sentiment remained fragile and the first trading day of the year was subdued, with many countries, including big trading centres such as Britain and Japan, closed for a holiday. The dollar index, which measures the value of the greenback against a basket of major currencies, rose by around 0.14 per cent to 103.63 – off roughly six-month lows hit last week at around 103.38. The euro slipped by about a third of a per cent to $1.0683 , but was not far from its highest levels since June. Sterling was down 0.35 per cent at $1.2051 . Against the yen, the dollar fell 0.25 per cent to 130.76 , having hit its lowest levels since August last month. “There is an attempt by the dollar index to pull higher today but we do see that it is losing a good part of the strength it gained last year,” Ulrich Leuchtmann, head of forex research at Commerzbank, said. “After the last Fed meeting, the market was not convinced that the Fed won’t cut rates later in 2023. It’s going to be an interesting year.” Having raised rates by a total of 425 basis points since March to curb surging inflation, the Fed has started to slow the pace of hikes. That Fed tightening helped lift the dollar index 8 per cent last year in its biggest annual jump since 2015. Markets remain focused on central banks and inflation, as well as signals of how long and deep a recession might be. International Monetary Fund Managing Director Kristalina Georgieva said on Sunday that 2023 would be a tough year for the global economy. Data from China, meanwhile, showed factory activity shrank for the third straight month in December and at the sharpest pace in nearly three years STERLING STRUGGLES AGAINST STRONGER DOLLAR Sterling fell against the dollar, which swept higher against a range of currencies on Tuesday, while British manufacturers reported one of the sharpest falls in activity in over a decade. The pound was down 1.1% to $1.05445, its biggest drop since mid-December, and was 0.1% higher against the euro, trading at 88.41 pence. The downward swing can be attributed to a stronger dollar rather than UK-specific factors, market sources said. “I think it is more a strong dollar story, given that eur/usd, usd/jpy etc have shown similar price action since the openings,” Stuart Cole, head macro economist at Equiti Capital, said. The dollar – where investors usually head when risk sentiment is on – moved up to a two-week high, even as European equities rallied 1.7% “There is a sense of optimism in the markets this morning, reflected in the rallies we have seen in equities, although whether we are seeing the markets over-reacting to better news remains to be seen,” said Cole.The pound remains not far off a six month high of $1.24460 touched on Dec. 14, but the outlook is murky as recession fears, high inflation and a cost-of-living crisis weigh on the British economy. The S&P Global/CIPS UK manufacturing Purchasing Managers’ Index (PMI) was expected to sink to 45.3 in December from 46.5 in January, its lowest since May 2009 apart from two months at the start of the COVID-19 pandemic in 2020. The reading released on Tuesday was stronger than an initial estimate of 44.7 released last month, but well below the 47.8 reported in the equivalent euro zone survey on Monday. Britain’s Department of Work and Pensions said on Tuesday that millions of low-income households will receive cost-of-living support from the government of up to 900 pounds ($1,084) over the financial year. The BoE has hiked interest rates nine times since December 2021 to try to lower inflation that remains near a 41-year high. DOLLAR FALLS AS EUROPE’S INFLATION COOLS AND CHINA LIFTS THE AUSSIE The dollar fell on Wednesday, losing out to commodities currencies like the Australian dollar and against the euro, which got a lift from a raft of data that suggested European inflation may finally have peaked. The dollar was already under pressure from investors who have grown more optimistic over the prospect that China’s relaxation of tough COVID restrictions will breathe life into the world’s second largest economy. Data on Wednesday showed French consumer price pressures cooled by a lot more than expected in December, while the previous day German data also showed inflation fell significantly more than forecast. Spanish inflation data last week painted a similar picture. The euro, which on Tuesday posted its largest one-day drop against the dollar in two months, zipped up by as much as 0.82%, as traders latched on to the idea that softer inflation might mean a change in pace from the European Central Bank (ECB). This in turn might suggest the economy will take less of a knock. A series of separate reports showed business sector activity across the euro zone held up better than expected in December, despite intense pressure from soaring energy prices.“We’re a day and a half into the trading year, so we can’t read too much into it, but the recent inflation figures in the euro zone are coming down more quickly than expected,” TraderX market analyst Michael Brown said. The ECB in December sounded an unusually hawkish note, indicating it may lift rates by another 150 basis points in rapid succession. Wednesday’s macro data has cast some doubt on this, Brown said. “That’s the big story markets are latching onto,” he said. The euro was last up 0.5% against the dollar at $1.0603 and up 0.3% against the yen at 138.55. The standout performer on Wednesday was the Australian dollar, which roared as much as 2.3% higher against its U.S. counterpart, on a combination of optimism over China and following media reports that Beijing is discussing a possible removal of a ban on coal imports from Australia. STERLING WEAKENS AFTER BUSINESS ACTIVITY DATA POINTS TO RECESSION Sterling fell against the euro and the U.S. dollar on Thursday after business data highlighted the likelihood that Britain is already in recession. The S&P Global/CIPS UK Services Purchasing Managers’ Index (PMI) for December was revised slightly lower. While it marked an improvement from November’s reading, new business contracted for a second month running and the survey’s employment index fell to its lowest level since February 2021. The pound was 0.44% weaker against the euro at 88.33 pence at 1125 GMT, and was set for its biggest daily decline since December 21. It fell 0.33% versus the U.S. dollar to $1.2019. “I think there’s a lot of pessimism about the UK, and I think this is hanging over from last year. If we look at the fundamentals, they haven’t changed an awful lot from last year. We’ve got an economy which is almost certainly in recession (and) we’ve got this long legacy now of low productivity, no investment growth,” said Jane Foley, head of FX strategy at Rabobank in London. “I think it’s difficult for the market to become enthusiastic about sterling. It is easier to sell the pound than to buy it.” The survey came a day after Prime Minister Rishi Sunak promised to tackle Britain’s most serious problems, with pledges to halve inflation, grow the economy and reduce debt. The Times reported that Sunak is poised to announce legislation to curb strikes as Britain is facing a wave of strikes in various sectors including the rail network as surging inflation follows more than 10 years of stagnant wage growth, leaving many workers unable to make ends meet. DOLLAR WAVERS AFTER FED MINUTES OFFER FEW SURPRISES The dollar was roughly flat in choppy trading on Thursday after the release of the latest Federal Reserve minutes. Details of the discussion from the central bank’s December policy meeting, released on Wednesday, showed policymakers remain focused on curbing inflation and do not envisage interest rate cuts in 2023. Analysts said the minutes were broadly in line with expectations, explaining the relatively muted reaction in markets. The euro was last up 0.05% against the dollar at $1.061. It rose 0.54% on Wednesday after French inflation came in lower than expected, boosting optimism about the euro zone economy. Fed officials projected in December that the main interest rate, currently in the 4.25%-4.50% range, would rise to just over 5% in 2023 and likely remain there for some time. The latest minutes reiterated the hawkish message on Wednesday, saying that “no participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023”.The dollar index, which measures the currency against major peers, was last up 0.06% at 104.27 on Thursday. It has fallen sharply from September’s 20-year high of 114.78 as investors have bet that a slowdown in growth and inflation will push the Fed to cut interest rates next year. “There is definitely a real difference here between what the Fed believes and what the money market believes,” said Jane Foley, head of FX strategy at Rabobank. Foley said brighter prospects for the euro zone and China were likely weighing on the dollar, and that economic data would determine whether the Fed sticks to its rate hike plans. The latest U.S. monthly employment figures, for December, are due on Friday.

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