CAPITALDIGEST MARKET REVIEW. 18TH OCTOBER 2021

MONDAY 11/10/2021 – STERLING RISES AS BOE POLICYMAKER SAYS GET READY FOR EARLY RATE INCREASE Sterling rose against both the euro and the dollar after the Bank of England said inflation levels in Britain were concerning and urged Britons, in interviews published over the weekend, to get ready for earlier interest rate increases. BoE Governor Andrew Bailey stressed the need to prevent inflation – running above the 2% target – from becoming permanently embedded. Fellow policymaker Michael Saunders said households must brace for “significantly earlier” interest rate rises. Interest rate futures traded on the CME showed November contracts were pricing in as much as a 20% probability of a rate hike next month compared with 12% last week, while December futures were pricing in a 45% probability of a rate increase by then. A separate estimate from Refinitiv based on interest rate futures suggested a 15 bps rate hike by December is now fully priced in. The two-year gilt yield touched 0.618%, its highest since January 2020. In early London trading, sterling rose to a two-week high versus the dollar of $1.3674, but it lost some steam edging 0.1% higher at $1.3634 by 1440 GMT.   TUESDAY 12/10/2021 – POUND PINNED NEAR 2-WEEK HIGHS AFTER UK JOBS DATA LEAVES RATE BETS INTACT Sterling held near a two-week high against the dollar on Tuesday as UK jobs data came in largely in line with forecasts, keeping expectations for future rate rises from the Bank of England intact. The pound hit a two-week high against the greenback on Monday on hawkish comments from BoE governor Andrew Bailey, who stressed the need to prevent inflation, and fellow policymaker Michael Saunders, who said households must brace for “significantly earlier” interest rate rises. The BoE, which is gearing up to become the first major central bank to raise rates since the coronavirus crisis struck, is watching to see how many people became unemployed after the end of the country’s pandemic furlough programme. Data showed British employers expanded their payrolls to a record high in September, while the unemployment rate edged down to 4.5% in the three months to August, in line with economists’ forecasts in a Reuters poll. Money market pricing shows around an 8 basis point rate hike from the BoE priced in as early as the Bank’s November meeting. By 1510 GMT, sterling traded about flat against the dollar near the $1.36 mark and below Monday’s peak of $1.3674 . Against the euro, it was a touch higher, up 0.1% at 84.91 pence.   WEDNESDAY 13/10/2021 – STERLING SHRUGS OFF WEAKER-THAN-EXPECTED UK GDP, HIGHER U.S. INFLATION Sterling edged higher on Wednesday as traders shrugged off data showing weaker-than-expected economic growth in Britain and rising U.S. consumer prices, and focused on bets that the Bank of England will raise interest rates. Britain’s economy grew 0.4% in August, leaving it just 0.8% smaller than it was in February 2020, the Office for National Statistics said. Economists polled by Reuters had forecast monthly gross domestic product growth of 0.5% for August. Economic data this week, including UK jobs figures for September that came in largely in line with forecasts, “gave no reasons for markets to scale back their aggressive pricing for Bank of England tightening”, ING told clients in a note. Sterling briefly fell below $1.36 against the dollar, after data showed U.S. consumer prices increased solidly in September and are poised to rise further amid a surge in the costs of energy products, casting doubts on the Federal Reserve’s view that high inflation was transitory. But at 1505 GMT, the pound was up 0.4% at $1.3642, not far from a two-week high touched on Monday. The BoE, facing a jump in inflation, looks set to be the first major central bank to raise interest rates since the beginning of the pandemic. Investors are betting on a rise to 0.15% by December. Over the weekend, BoE governor Andrew Bailey stressed the need to prevent inflation from becoming permanently embedded, and fellow policymaker Michael Saunders said households must brace for “significantly earlier” interest rate rises. But some analysts have pointed out that sterling had failed to react to renewed post-Brexit disputes over the Northern Irish protocol, which governs trade in the province. “I think Brexit and trade should be a bigger issue for GBP than it is,” said Marshall Gittler, head of investment research at BDSwiss Holding.   THURSDAY 14/10/2021 – DOLLAR DIPS IN CHOPPY TRADING AS RISK APPETITE IMPROVES The dollar was slightly lower on Thursday in choppy trading, having erased most of its early session losses, as investors bet the Federal Reserve would begin tapering its asset purchases next month and attention turned to the timing of interest rate hikes. The greenback had rallied since early September on expectations the U.S. central bank would tighten monetary policy more quickly than previously expected amid an improving economy and surging inflation. But the dollar reversed course on Wednesday, even after the minutes of the Fed’s Sept. 21–22 policy meeting confirmed the tapering of stimulus is likely to start this year and data showed that pricing pressures were still hitting U.S. consumers. “I think what we’ve seen over the last day or two is a little bit of profit-taking,” said Shaun Osborne, chief FX strategist at Scotia Capital. “I don’t think this is, at the moment, anything close to a significant reversal in the dollar trend, and in fact, I think what we’ve seen today might be a sign that the corrective rebound that we’ve seen over the past day or two has perhaps run its course,” he said. The market is expecting that the Fed will begin tapering its asset purchases as early as next month, and that the wind-down of the massive bond-buying program will happen fairly quickly, Osborne added.   FRIDAY 15/10/2021 – STERLING TOUCHES THREE-WEEK HIGH, BOOSTED BY BOE RATE HIKE EXPECTATIONS Sterling rose to a three-week high in early trading on Friday and was on track for its best week since August versus the dollar, boosted by rising expectations that the Bank of England will raise rates this year. Many investors are betting the BoE will become the first major central bank to lift interest rates since the start of the coronavirus pandemic. The market is pricing in a 72.4% chance of a rate hike at the BoE’s December 2021 meeting, up from a 45.6% chance a week ago, according to CME data. The pound has also been helped by dollar weakness over the past three sessions. At 0812 GMT, sterling was up 0.5% against the dollar at $1.3735, having earlier in the session risen to as high as $1.3739 – its strongest since Sept. 23. It was on track for its biggest weekly rise since the last week of August. Versus the euro, it was up around 0.3% at 84.61 pence per euro. The pound jumped against the dollar on Monday after BoE Governor Andrew Bailey stressed the need to prevent inflation from becoming permanently embedded and fellow policymaker Michael Saunders said households must brace for “significantly earlier” interest rate rises. But on Thursday, two other policymakers – Catherine Mann and Silvana Tenreyro – made more dovish remarks, pushing back against the idea of raising rates. ING FX strategists said that the dovish comments did not significantly impact the market’s expectations for a rate rise. “Looking beyond today’s price action, we still think sterling may have to give up some of its recent gains as our economist expects the BoE to underdeliver on monetary tightening,” ING said in a client note.