CAPITALDIGEST, MARKET REVIEW. 17 JANUARY, 2022.

MONDAY 10/1/2022 – FOREX-DOLLAR RISES ON U.S. INTEREST RATE HIKE OPTIMISM The dollar edged higher against a basket of currencies on Monday as recent employment data prompted some Wall Street banks to raise their estimates for how quickly the Federal Reserve will raise interest rates this year. The dollar index , which measures the greenback against six major peers, was up 0.2% at 95.993. The index remains close to the 16-month high it touched late in November. The dollar was supported by Friday’s closely watched employment report which suggested the U.S. job market was at or near maximum employment. “A number of sell-side firms have revised their Fed forecasts after the NFP (nonfarm payroll) report on Friday,” Brad Bechtel, global head of FX at Jefferies, said in a note. “With the unemployment rate below 4%, the Fed could probably declare their job on employment ‘completed’ which does indeed set us up for an even faster period of taper potentially,” Bechtel said. Goldman Sachs expects the Fed to raise interest rates four times this year and begin the process of reducing the size of its balance sheet as soon as July. The investment bank, which earlier predicted the Fed would raise rates in March, June and September, now expects another hike in December. On Friday, J.P. Morgan and Deutsche Bank also forecast an aggressive tightening of U.S. monetary policy. Traders have priced in an 80% chance of a rate hike in March, according to CME’s FedWatch tool. Rising Treasury yields – the benchmark U.S. 10-year Treasury yield rose to its highest level in almost two years on Monday – also supported the greenback.   TUESDAY 11/1/2022 – STERLING STEADIES NEAR 23-MONTH HIGH VERSUS EURO Sterling rose on Tuesday to touch a pre-pandemic high versus the euro, supported by expectations that the Bank of England will raise interest rates further. The pound edged 0.1% higher versus the euro at 83.35 pence by 1600 GMT, after touching its highest level versus the single currency since February 2020. Against the dollar, it rose 0.2% at $1.3611, hovering around its highest level since Nov. 4, when the pound slid 1.5% on the day after the BoE surprised the market by keeping interest rates unchanged. Over the past weeks, investors have ramped up expectations that the BoE will raise interest rates as early as next month after a surprise hike in December by 15 basis points, to 0.25%. You-Na Park-Heger, FX analyst at Commerzbank, said the prospect of interest rate hikes by the BoE is supporting sterling. But “quite a bit of it is likely to be priced in already so that the GBP rally could begin to run out of steam”, she added. Jane Foley, head of FX Strategy at Rabobank in London, said sterling has also gained some support from signs of weakness in the U.S. dollar. Against a basket of currencies, it was trading on Tuesday well below the 16-month highs it touched in November despite rising bets this month that the Federal Reserve will raise interest rates sooner than initially expected.   WEDNESDAY 12/1/2022 – DOLLAR SLUMPS AS U.S. INFLATION SURGE COMES IN LINE WITH EXPECTATIONS The dollar fell to a two-month low against a basket of currencies on Wednesday after data, which showed an expected surge in U.S. consumer prices in December, fell short of offering any new impetus for the Federal Reserve’s policy normalization efforts. The U.S. Dollar Currency Index , which tracks the greenback against six major currencies, was down 0.7% at 94.944, after slipping as low as 94.903, its lowest since Nov. 11. U.S. consumer prices surged in December, with the annual increase in inflation the largest in nearly four decades, which could bolster expectations that the Federal Reserve will start raising interest rates as early as March. read more The consumer price index increased 0.5% last month after advancing 0.8% in November, the Labor Department said on Wednesday. In the 12 months through December, the CPI surged 7.0%, the biggest year-on-year increase since June 1982. Economists polled by Reuters had forecast the CPI gaining 0.4% and shooting up 7.0% on a year-on-year basis.   THURSDAY 13/1/2022 – DOLLAR EXTENDS DROP AS POSITIONING AND TECHNICAL SELLING WEIGH The dollar extended its fall against a basket of currencies on Thursday to a two-month low, a day after data that showed an expected surge in U.S. consumer prices in December fell short of offering any new impetus for the Federal Reserve’s policy normalization efforts. The U.S. Dollar Currency Index, which tracks the greenback against six major currencies, was down 0.1% at 94.866, its lowest since Nov. 10. The index, which rose 6.3% in 2021, is down about 1% for the week, on pace for its worst weekly performance in about eight months. “Coming into the new year the dollar positioning was very much skewed to being long,” said Mazen Issa, senior FX strategist at TD Securities. “Yesterday’s inflation numbers, in conjunction with (Fed Chair Jerome) Powell’s testimony for his nomination hearing, were basically just in line with what markets had already positioned for,” Issa said. “There wasn’t anything materially new.” December’s monthly U.S. inflation figures, published on Wednesday, were a fraction higher than forecast and the increase in year-on-year consumer price inflation was, as expected, 7% – its biggest jump since June 1982. Nevertheless, traders do not see these inflation readings as urgently shifting an already hawkish Fed too much. With at least three interest rate hikes already in the market price, some investors pared bets on further dollar gains.   FRIDAY 14/1/2022 – FOREX-DOLLAR SNAPS THREE-DAY LOSING STREAK AS SELLING PRESSURE ABATES The U.S. dollar snapped a three-day losing streak on Friday as the recent selling spree driven by the view that Federal Reserve tightening moves were largely priced in abated, and as weaker risk appetite in financial markets led investors to shun riskier currencies. The U.S. dollar index =USD was 0.3% higher at 95.157, but still looked set to finish the week down about 0.6%, its worst weekly showing since early September. The greenback, which rose more than 6% against a basket of currencies in 2021, came under pressure this week despite Fed Chair Jerome Powell saying that the U.S. economy is ready for the start of tighter monetary policy and data showing the largest annual rise in inflation in nearly four decades. “Investors appear to be taking the view that the USD has peaked and that Fed tightening moves are priced in and the likes of the euro offer better potential returns down the road,” Scotiabank foreign exchange strategists said in a note.