CAPITALDIGEST, MARKET REVIEW 12TH SEPTEMBER, 2022

POUND SLIDES AHEAD OF BRITISH PM TRUSS’S ENERGY PLAN The pound on Thursday was sliding back towards its 37-year low hit the day before, ahead of the announcement of new policies designed to deal with the rising cost of energy in Britain and a very closely watched meeting by the European Central Bank. Sterling GBP=D3 was at $1.1486, down 0.42% and heading back towards the $1.1407 it hit on Wednesday, its lowest since 1985. The euro, which similarly has been plunging versus the greenback, hit a fresh two-and-a-half month high on the pound of 86.95 pence. EURGBP= New Prime Minister Liz Truss is due to announce plans to cap soaring consumer power bills on Thursday and promote new sources of energy in an expected 100 billion pound ($115 billion)-plus package designed to limit the economic shock caused by the war in Ukraine. She is expected to set out her plan to lawmakers at around 1000 GMT, and investors are closely watching how it will be funded. “While in theory this (Truss’s plan) could be perceived as a clear positive for the UK economy in the near-term and provide a source of encouragement for the pound, as it would help stave off the risk of a deep recession, investors are yet to see it that way,” said Matthew Ryan, head of market strategy at Ebury EURO HOLDS ABOVE 2-DECADE LOW BEFORE ECB DECISION The euro was hovering above Tuesday’s two-decade low on Thursday as investors awaited a policy decision from the European Central Bank (ECB) and comments from the head of the Federal Reserve for insight on the path for global monetary tightening. The ECB is expected to raise rates by 75 basis points (bps), taking its deposit rate above zero for the first time since 2012, but the option of a smaller 50 basis point hike hasn’t been ruled out. “We expect the ECB to only do 50 basis points today, instead of the consensus view of 75,” said Chris Turner, head of markets at ING. “If that’s the case, we think euro-dollar probably corrects back down to about $0.99.” By 0747 GMT, the euro was trading down 0.3% at $0.99795, holding above its lowest level since late 2002 of $0.9864 as Europe’s energy crisis keeps the single currency under pressure and the dollar reigns as the Fed reiterates its commitment to bring inflation down to target. Fed Chair Jerome Powell is scheduled to participate in a discussion at 1310 GMT — overlapping with ECB chief Lagarde’s post-decision press conference — with Fed officials soon due to enter into a blackout period prior to the central bank’s Sept. 20-21 meeting. Recent Fed rhetoric has continued to be hawkish overall. FOREX-DOLLAR SLIDES AS INVESTORS BALANCE POSITIONS AHEAD OF U.S. INFLATION DATA The dollar fell to a more than one-week low on Friday as investors consolidated gains after a sharp rise against most currencies, ahead of a U.S. inflation report that could determine the size of the Federal Reserve’s rate hike at this month’s policy meeting. On the week, the dollar index, which tracks the greenback’s value against six major peers, posted its first weekly fall in four on Friday. “Markets are getting a little nervous about levels, really historic levels, so the market decided not to push the dollar’s strength at this juncture and lightened up positions,” said Greg Anderson, global head of FX strategy, at BMO Capital Markets in New York. “Probably position-taking will be light until the FOMC (Federal Open Market Committee) meeting. The market looked at everything overnight and decided that this is a good juncture to square up and that process has brought the dollar lower. But this is not a reversal of the trend on dollar strength,” he added. The greenback this week soared to a 24-year high against the yen, a 37-year peak versus sterling, wit the dollar index surging to a more than 20-year high. On Friday, the dollar index dropped as low as 108.35 and was last down 0.5% at 108.96 =USD. STERLING GAINS ON FALLING DOLLAR AS BRITAIN FACES UNCERTAIN FUTURE Sterling jumped against the dollar on Friday, as most majors fought back against the greenback’s recent strength, capping a volatile week in which the pound hit a 35-year low, Britain saw a new prime minister, and Queen Elizabeth passed away. The pound rose over 1% in early London trade to as much as $1.1646, its highest level this month, it later pared gains and was last up 0.7% at $1.158. Sterling’s moves against the euro were much more muted. The euro was a whisker lower at 86.81 pence. “Today it’s a dollar story, and we are seeing the pound trade in line with that broader theme” said Simon Harvey, head of FX analysis at Monex Europe. The euro at one point was also up 1% on the dollar to a three-week top, with the Japanese yen, the Australian dollar Swiss franc and Canadian dollar also posting large gains on the greenback, though all later gave some of those back. The yen and euro have all recently hit multi-year lows versus the dollar this week, and sterling fell as low as $1.1407 on Wednesday, its lowest since 1985. “We’re finally seeing central banks pushing back against this stronger dollar narrative, and we’re starting to see fiscal authorities responding to the causes of it especially in Europe,” said Harvey. DOLLAR RELAXES AFTER STEEP CLIMB, EURO GAINS ON ECB HIKE The dollar took a breather from its surging rally on Friday as markets digested yet more hawkish Fed speak, while the euro hung on to parity, helped by an outsized rate hike from the European Central Bank. Currency moves overnight were calmer for once even as Federal Reserve Chair Jerome Powell reaffirmed the central bank’s aggressive stance against inflation, which reinforced the greenback’s dominance. The euro was up 0.52% at $1.0050, inching away from its two-decade trough of $0.9864 hit earlier in the week as speculators took profits on crowded short positions. The ECB on Thursday raised its key interest rates by an unprecedented 75 basis points and promised further hikes to come in its fight against inflation, even as the bloc is likely heading towards a winter recession and gas rationing. The single currency is on track for a 0.9% weekly gain, snapping three straight weeks of decline, but has nonetheless fallen more than 10% this year. Meanwhile, sterling was last up 0.43% to $1.1547, reversing its losses from the previous session.