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CAPITALDIGEST, MARKET REVIEW. 14 FEBRUARY 2022

MONDAY 7/2/2022 – STERLING RISES VS THE EURO AFTER POST-ECB TUMBLE Sterling rose against the euro on Monday, catching a break after a sharp slide last week triggered by the European Central Bank message it no longer ruled out a 2022 interest rates hike, which overshadowed the Bank of England’s rate rise. By 0940 GMT, sterling rose 0.2% against the euro to 84.49 pence, after it touched its lowest level against single currency since December on Friday. It was up 0.1% against the dollar at $1.3534. ING strategists said sterling was “staying reasonably supported after last week having been hit by the hawkish re-assessment of ECB policy.” On Thursday, the ECB surprised markets by suggesting for the first time that an interest rate rise this year was a possibility and that call outweighed the impact of BoE’s well-anticipated rate rise. While a quarter-point hike was largely expected, a split vote came as a surprise, as four of the nine Monetary Policy Committee members wanted a 50 bps move. BoE also warned inflation could top 7%. As more and more central banks move to tighten monetary policies, Kit Juckes, head of FX strategy at Societe Generale in London, expects sterling to be one of the biggest losers among major currencies in the near term.   TUESDAY 8/2/2022 – DOLLAR TICKS DOWN, EURO UP AHEAD OF U.S. CPI REPORT The dollar slid further on Wednesday and the euro extended gains following a hawkish shift from the European Central Bank last week and ahead of key data on U.S. consumer prices due on Thursday. The CPI print may offer new indications about the pace of the Federal Reserve’s monetary tightening, and investors are bracing for higher-than expected numbers that would signal more aggressive interest rate hikes. That readout is expected to show a 0.5% month-over-month increase in January, and 7.3% for the year, according to economists polled by Reuters. Investors have been revising their forecasts for ECB rate hikes after the bank caught them off guard last week, with President Christine Lagarde flagging for the first time that monetary tightening was a possibility this year. Seeking to temper investors’ growing expectations for hard-line action, Lagarde calmed markets when she said on Monday there was no need for extensive tightening. But the big shift in central bank policy expectations over the past week, in particular from the ECB, has dampened the dollar’s recent upside.   WEDNESDAY 9/2/2022 – STERLING FLAT AGAINST EURO AHEAD OF BOE SPEAKER Sterling was flat against the euro not far from a 1-1/2 month low on Wednesday, while investors await a speech by a senior Bank of England official later in the day. The pound fell sharply against the single currency last week after the ECB’s unexpected hawkish shift boosted euro zone yields, overshadowing the Bank of England’s move of raising rates by 25 basis points. Bank of England Chief Economist Huw Pill, who will give a speech at the annual conference of Britain’s Society of Professional Economists, “was one of the majority five Monetary Policy Committee (MPC) members voting for just a 25bp hike last week”, ING analysts said. “We think the BoE will welcome the role the strong pound is playing in deflecting some of the energy price surges – and see no reason for the BoE to start railing against aggressive pricing of the BoE trajectory,” they added. The pound was flat against the euro at 84.22 pence within striking distance of its post-ECB low at 84.74 pence. Money markets are still pricing in a 25 bps rate increase in March and 125 bps by December 2022, but some analysts have warned about the risks of excessive expectations.   THURSDAY 10/2/2022 – DOLLAR GAINS AS UKRAINE TENSIONS RISE AFTER U.S. WARNING The dollar rose along with other safe-haven assets on Friday after the United States said Russia has massed enough troops near Ukraine to launch a major invasion. A Russian attack could begin any day and would likely start with an air assault, White House national security adviser Jake Sullivan told a media briefing. The dollar had been trading mostly sideways when the U.S. warning hit markets. The dollar index, a measure of the greenback against six major currencies, rose 0.258%. U.S. crude futures jumped more than 5% to $94.66 a barrel, the highest since 2014, while gold rose more than 2% to a near two-month high at one point. The dollar’s rise was due to Sullivan’s comments, as well as reports that Russian President Vladimir Putin had decided to invade Ukraine, which the White House later disputed, said Bipan Rai, head of FX strategy at CIBC Capital Markets in Toronto. That move up, along with moves in other safe-haven assets such as U.S. Treasuries and the Japanese yen, indicates the market is growing more and more concerned about the prospect of an invasion, said Rai. “It’s definitely a safe-haven move,” he said. The Japanese yen strengthened 0.63% versus the greenback at 115.29 per dollar, while the Canadian dollar weakened as the potential for an imminent Russian attack triggered a sell-off in risk-sensitive assets.   FRIDAY 11/2/2022 – STERLING HOLDS GROUND VS RESURGENT U.S. DOLLAR The British pound held its ground on Friday and was set to post a second consecutive weekly gain as expectations of rising interest rates propped up the currency. Against the U.S. dollar, the pound was broadly steady at $1.3566 but was set to rise 0.3% for the week. Versus the euro, the pound gained 0.3% higher at 84.01 pence. The pound’s strength against the dollar was a stark contrast to the greenback’s other major rivals which weakened in early London trading amid rising expectations of U.S. interest rate increases in the coming weeks. As much as another 150 bps in increases are priced in for the remainder of the year by the Bank of England compared to nearly 170 bps by the U.S. Federal Reserve. Lukewarm monthly economic growth data in December failed to weigh on the pound. Britain suffered a smaller economic hit than feared in December as COVID-19 cases mounted, capping a historic two-year collapse and rebound for the world’s fifth-biggest economy, but surging inflation is set to slow the recovery in 2022.

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