CAPITALDIGEST, MARKET REVIEW. 14, MARCH, 2022.
MONDAY 7/2/2022 – STERLING SOARS AGAIN VS EURO, WEAKENS AGAINST DOLLAR
The British pound roared to another 5-1/2 year high versus the euro but dropped to its weakest since December 2020 against the dollar, as another volatile session sent investors to buy dollars. European currencies have been falling fast since Russia invaded Ukraine as investors worry about the impact on their economies of the war and the surge in commodity prices. While the UK economy is not as exposed as euro zone economies, the pound has been suffering versus the dollar but powered ahead against a euro falling against nearly all currencies. By 1000 GMT, the pound was down 0.4% at $1.3175, having weakened to as low as $1.3157, its lowest since December 2020. Against the euro, sterling rose 0.2% to 82.035 pence in Asian hours, its strongest since June 2016. Investors have pared back their expectations for policy tightening from central banks including the Bank of England given the prospect of slowing economic growth. But traders are still pricing in a 25 basis point hike in rates from the BoE when it meets next week.
TUESDAY 8/3/2022 – EURO ADVANCES FROM 22-MONTH LOWS ON EU BOND ISSUANCE REPORT
On Tuesday, the euro climbed from 22-month lows against the US dollar hit the previous session, lifted in part by expectations that the euro zone will increase fiscal spending to help offset the economic effects of the Ukraine crisis. Investors were also hesitant to sell the euro ahead of a European Central Bank policy meeting on Thursday. The prospect of stagflation has prompted economists to suggest policymakers might delay rate hikes until late in the year. Europe’s single currency, which has been so negatively affected since the start of the latest geopolitical turmoil, also gained versus other currencies such as the yen, Swiss franc and sterling. The euro regained some ground after five sessions of declines versus the dollar. It was up more than a cent from a trough of $1.0806 on Monday, its lowest since March 2020 when the COVID-19 pandemic gripped Europe. The single currency was last up 0.5% at $1.0906 .
WEDNESDAY 9/3/2022 – STERLING REBOUNDS AS DOLLAR RALLY GOES INTO REVERSE
The British pound rebounded against the U.S. dollar on Wednesday as a drop in oil prices and an upswing in sentiment pushed the greenback rally triggered by Russia’s invasion of Ukraine into reverse. European and U.S. stock markets were staging a tentative rebound after four straight sessions of heavy losses with investors bargain hunting again amid fresh yet shaky optimism about a diplomatic solution to the conflict. The pound was up 0.48% at $1.3165 at 1607 GMT while the dollar index lost over 1% against its main currency rivals . The euro, also boosted by speculation of a new defence and energy stimulus package from the European Union, was the main beneficiary of the session’s risk-on sentiment, rising about 1.4% against the dollar. The pound itself retreated 0.94% to 83.93 pence against the euro, stepping away from a 5-1/2-year high on Monday.“Chatter earlier this week about joint bond issuance has helped support this week’s rebound in the euro, however it’s hard to see how the current move higher can be sustained unless there is something tangible to come out of tomorrow’s summit, other than warm words”, commented CMC Markets analyst Michael Hewson.
THURSDAY 10/3/2022 – STERLING RISES VERSUS EURO AFTER ECB POLICY MEETING
Sterling rose against the euro on Thursday after a brief fall when the European Central Bank announced it would end asset purchases earlier then expected. Meanwhile, it fell versus the dollar after easing oil prices and unsuccessful talks between Ukraine’s and Russia’s foreign ministers failed to dampen demand for safe-haven currencies. The ECB moved ahead with its exit from stimulus, adding that bond buys in the third quarter will be “data-dependent” while it could still revise its schedule if the inflation outlook changes. Sterling rose 0.3% against the euro to 83.71 pence by 1528 GMT on Thursday, after briefly falling to its lowest level since February 10 at 84.33 pence. It hit its highest since June 2016 at 82.035 on March 7. “The fact that the ECB is going to discontinue its net asset purchases does show this willingness to still try and take more baby steps to keep a lid on inflation rather than moving in immediately like the Federal Reserve and the Bank of England,” Susannah Streeter, senior analyst at Hargreaves Lansdown, said. Money markets have been increasing their bets on the ECB’s monetary policy tightening in the last three sessions after scaling them back sharply right after the Russian invasion of Ukraine on Feb. 24. They are currently pricing in around 40 basis points (bps) of ECB rate hikes before year-end, while they forecast the Bank of England’s rate hikes to be worth around 150 bps in 2022.
FRIDAY 11/3/2022 – DOLLAR HITS 5-YEAR PEAK ON YEN, EURO HOUNDED BY GROWTH RISKS
The dollar hit a new five-year top on the yen on Friday after a strong U.S. inflation report, while the euro struggled to hold its own as a hawkish turn from the European Central Bank was offset by growth risks emanating from the Ukraine crisis. The greenback rose as high as 116.55 yen in early trade, its highest level since January 2017. The dollar is up 1.5% on the yen this week, its biggest weekly gain since October.
“Dollar-yen looks to be overwhelmingly a yield play. It seems the contrast between an on-hold BOJ and a Fed readying for liftoff is just too tempting to ignore,” said Sean Callow, a senior currency strategist at Westpac. Both the Federal Reserve and the Bank of Japan have policy meetings next week, but while the Fed is all but certain to hike rates from their pandemic low, the BOJ is set to remain an outlier and hold onto a dovish stance on monetary policy, weighing on the yen.