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CAPITALDIGEST MARKET REVIEW, 19/12/2022

FOREX-DOLLAR GAINS AFTER HAWKISH FED, POUND UNDER PRESSURE FROM DOVISH BOE The dollar strengthened on Thursday a day after the U.S. Federal Reserve said it expected interest rates to stay higher for longer, while the pound came under pressure from a dovish message from the Bank of England (BoE). Up next is the European Central Bank, which will announce the result of its meeting at 13.15 GMT, capping a busy day for major central banks after Switzerland and Britain raised rates by 50 basis points (bps). Norway increased rates by 25 bps, while the Fed hiked by 50 bps on Wednesday. The euro EUR=EBS shed 0.5% to $1.06121, falling off a six-month peak hit a day before, while the dollar climbed 0.8% on the Japanese yen to 136.55. JPY=EBS The pound, which hit a six-month high on the dollar this week, fell 1% to $1.230 and weakened on the euro as well. The European common currency was up 0.37% at 86.33 pence after the Bank of England’s decision. EURGBP=D3 “The initial reaction is a dovish outcome with two members voting to keep the rate unchanged. However, the bank appears to be keeping its options open here, citing improvement in growth forecasts from November and still strong labour markets,” said Robert Dishner, senior portfolio manager – multi sector fixed income, at Neuberger Berman. STERLING FALLS AFTER BOE DELIVERS NINTH CONSECUTIVE RATE HIKE Sterling fell against the dollar on Thursday after the Bank of England delivered an expected half-percentage-point hike in interest rates, its ninth in a row, as it battles to bring down inflation which the central bank said has now peaked. While the 50 bps hike was widely expected, the announcement revealed a widening split between monetary policy committee members (MPC) members, darkening the visibility on future rate hikes from the central bank. The pound fell to a session low after the decision at midday, trading down as much as 1.2%. It was last down 0.84% to $1.23140, back to levels where it had been prior to the central bank’s decision. Against the euro the pound also fell, and was last 0.34% softer against the euro, trading at 86.19 pence. The BoE unveiled its eighth bank rate increase of 2022, striking a dovish tone as market players kept a close eye on how each of the nine MPC members voted. “The extent of the divisions across the committee is an eye-opener,” said Philip Shaw, chief economist at Investec in London. US DOLLAR GAINS SHARPLY ACROSS THE BOARD AS RECESSION FEARS MOUNT The U.S. dollar soared on Thursday, led by strong gains against the yen, sterling, and commodity currencies, as investors fretted about the risk of recession with the Federal Reserve likely to raise interest rates well into next year. The greenback’s allure was magnified, amid worsening risk appetite as stocks fell. Like the Fed, the European Central Bank raised interest rates for the fourth time in a row, although by less than at its last two meetings, pledged further hikes and laid out plans to drain cash from the financial system as part of its fight against runaway inflation. ECB President Christine Lagarde, in her press briefing, said upside inflation risks remain, which necessitates more tightening. The Bank of England also raised its key interest rate by a further half-percentage point on Thursday and indicated more hikes were likely. Investors though bet that the BoE might be getting close to the end of its increases in borrowing costs.”Both the Fed and ECB delivering more hawkish rate steers are compounding recession fears,” said Joe Manimbo, senior market analyst at Convera in Washington. “The dollar’s boost from the Fed stems from it not being done raising rates and Chair (Jerome) Powell setting a high bar for rate cuts.” The Fed projected at least an additional 75 bps of increases in borrowing costs by the end of 2023. Its projection of the target federal funds rate rising to 5.1% in 2023 is slightly higher than investors expected. CENTRAL BANKS HIKES SET STERLING FOR BIGGEST WEEKLY DROP SINCE NOVEMBER The pound fell on Friday against the euro and the U.S. dollar, setting it on track for its biggest weekly declines against the two currencies since early November after a raft of central bank interest rate hikes. The Bank of England (BoE) delivered an expected half-percentage-point increase in interest rates on Thursday, its ninth in a row. But while the BoE was taking the view that inflation has now peaked, other central banks flagged they are far from finished with rate hikes. The European Central Bank (ECB) raised interest rates and signalled more will follow. The U.S. Federal Reserve on Wednesday also increased interest rates by a half percentage point and said it will deliver more rate hikes next year. “The BoE has struggled to support the pound with rate hikes this year,” said Jane Foley, head of FX Strategy at Rabobank London. “Although this week’s meeting did not contain fresh quarterly economic forecasts, the recessionary backdrop painted by the Bank remains dour. At the same time, the Bank’s message this week was far less hawkish than that provided by the ECB.” Sterling fell 0.2% to $1.2160 against the dollar, after briefly touching a nine-day low against the U.S. currency. STERLING RECOIL PAINTS BOE AS WEAKEST LINK Sterling’s withering slide on Thursday in the thick of this week’s central bank tightening spree suggests the BoE is favourite to be the first among Western peers to blink when faced with a deepening economic downturn next year – even if inflation is still above target by then. Fair assessment or not, that calculation feeds off deep splits within the Bank’s monetary policy committee (MPC) and a peculiarly British vulnerability to the unfolding downturn that was revealed in technicolour during September’s UK budget farce. In what first appeared like an impressive show of force this week, the U.S. Federal Reserve, the European Central Bank, Swiss National Bank and Bank of England all raised interest rates by half a percentage point each and all signalled determination to tighten policy further to snuff out inflation. But while soundings and guidance around the future resolve of the Fed, ECB and SNB were seen as relatively hawkish, it was a different takeaway from the UK central bank. Revealing doubts, the recently buoyant pound took the heat on the day. Sterling recoiled more than 1% against the euro – in its second worst day since the September collapse and among the worst five days it’s seen since the pandemic hit. It also fell 1.5% against the dollar and 1% on the Swiss franc. The primary reason was that two of the nine-person MPC voted to end the Bank’s rate rise campaign right away as the recession the Bank thinks is already underway will get entrenched next year.

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