CAPITALDIGEST MARKET REVIEW 19 JULY 2021

MONDAY 12/7/2021 – FOREX-DOLLAR EDGES HIGHER AMID PANDEMIC CONCERNS; U.S. INFLATION DATA EYED The dollar climbed across the board on Monday as concerns about the pandemic encouraged investors to seek a safe haven, and as they awaited more clues about the global economic recovery. With markets hyper-sensitive to any talk of early tapering, U.S. inflation data on Tuesday will be closely watched ahead of testimony by Federal Reserve Chair Jerome Powell on Wednesday and Thursday. “Market caution reigned at the start of the week, weighing on risk sentiment and boosting the U.S. dollar,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. Reports from around the globe of surging infections of the Delta coronavirus variant also hurt investors’ appetite for riskier assets. Investors will look to U.S. inflation data on Tuesday and Federal Reserve Chair Jerome Powell’s economic testimony on Wednesday and Thursday as they gauge expectations for the Fed to dial back on stimulus as soon as this year, Manimbo said. “A hotter report will likely boost Treasury yields and the dollar, and bring the Fed taper conversation back to the forefront,” Ronald Simpson, managing director, global currency analysis at Action Economics, said in a note. The dollar index =USD, which measures the greenback against a basket of six currencies, was 0.1% higher at 92.264. The index remains close to a 3-month high of 92.844 touched last week. The Australian dollar AUD=D4, often viewed as a liquid proxy for risk, was 0.17% lower on the day.   TUESDAY 13/7/2021 – POUND EXTENDS FALL AFTER U.S. INFLATION DATA LIFTS DOLLAR Sterling fell against the dollar on Tuesday after data showing the highest U.S. inflation in 13 years sent the greenback surging to a six-day high. The U.S. Labor Department said the consumer price index increased 0.9% last month, the largest gain since June 2008, while so-called core CPI surged 4.5% on a year-on-year basis, the largest increase since November 1991. The data which prompted markets to bring forward their U.S. rate hike expectations weighed on other currencies including the pound which extended earlier losses to touch a session-low of $1.37995 – down 0.6% on the day. By 1330 GMT it had stabilised at $1.38350. The currency flatlined against the euro at 85.46 pence . The pound eased earlier in the day from the two-week highs hit on Monday when the Bank of England scrapped pandemic-era curbs on British banks’ dividend payments but warned in its Financial Stability Report (FSR) that some asset prices looked stretched. The BOE added it was keeping an eye on the housing market and how fast price rises translated into household indebtedness. Jeremy Stretch, head of G10 FX strategy at CIBC Capital Markets, said sterling had reacted to “the negative references in the BoE FSR press conference”. “Bailey has underlined heightened sensitivity to higher borrowing in weaker parts of the economy in addition to warning regarding potential threats to asset price valuations,” he added. Sterling has been among the top performing G10 currencies this year following Britain’s quick vaccination rollout, which encouraged hopes for a quick economic recovery.   WEDNESDAY 14/7/2021 – DOLLAR DECLINES AS FED’S POWELL MAINTAINS DOVISH MESSAGE The dollar pared recent gains on Wednesday after Federal Reserve Chair Jerome Powell told Congress the U.S. economy was “still a ways off” from levels the central bank wanted to see before tapering its monetary support. His comments came as a report showed U.S. producer prices rose more than expected, posting their biggest annual increase in more than 10-1/2 years. A day earlier, data showed June U.S. inflation hit its highest in more than 13 years. The strong inflation has lifted the greenback to just shy of its three-month high, as focus sharpened on when central banks around the world will begin withdrawing pandemic-era stimulus. That focus intensified on Wednesday after the Reserve Bank of New Zealand said it was ending bond purchases, raising expectations it could raise interest rates as soon as August. The Bank of Canada said it would cut its weekly bond purchases to C$2 billion ($1.6 billion) from C$3 billion.  But Powell, at the beginning of his two-day testimony to Congress, said the Fed is firm in its belief that current price increases are tied to the economic reopening and are transitory. “Powell maintained the dovish message, kind of pushing back against any concerns that he would change his tune, or the more patient approach that he’s been talking about, after the above expectation inflation release,” said Marvin Loh, senior global markets strategist at State Street. “They are still on this path to slowly taper asset purchases before they even start to consider rate hikes, so we’re still a couple of years away from that tightening based on everything that we’ve heard today,” he said. The dollar index was down 0.43% at 92.404, after rising as high as 92.832 – just below the 92.844 hit last week for the first time since April 5. Graphic: World FX rates   THURSDAY 15/7/2021 – POUND RECOUPS EARLY LOSSES ON SIGNS OF HAWKISH TURN AT BOE Sterling reversed earlier losses on Thursday and moved higher after Bank of England policymaker Michael Saunders said the central bank could decide to halt its bond-buying programme early because of an unexpectedly sharp rise in inflation. Money markets repriced interest rate expectations after his comments to price some 18 basis points of policy tightening by June 2022, compared to just 10 bps before, while two-year gilt yields rose to the highest since April 2020. The pound rose 0.2% against the dollar at $1.389 after Saunders’ comments, having earlier fallen as low as $1.381, but by 1525 GMT, it was trading flat at $1.386 as U.S. jobs data lifted the dollar against peers. Sterling firmed against the euro to 85.2 pence, up 0.2% , while staying off 3-1/2-month highs touched on Wednesday. Saunders’ comments add to signs of a change in stance at the BoE, where departing chief economist Andy Haldane had until recently been the sole voice advocating considering an end to pandemic-time stimulus. On Wednesday, BOE Deputy Governor Dave Ramsden said inflation could hit 4% this year, forcing the bank to reverse monetary stimulus sooner than expected. “We’ve seen the momentum shift in recent days when it comes to BoE policy tightening expectations. Two members now look to be pushing back on the prevailing dovish (inflation is transitory) view set out by Governor Bailey,” said Valentin Marinov, head of G10 FX at Credit Agricole. “The pound seems supported by its growing rate advantage versus the euro and the dollar…Indeed, the rates markets remain convinced that the BoE will start normalizing policy next year.”   FRIDAY 16/7/2021 – STERLING SLIPS AGAINST DOLLAR AS WORST WEEK FOR A MONTH LOOM Sterling slipped on Friday against the dollar, and headed for its worst week in a month, as investors sought safety in the greenback amid concerns over rising COVID-19 cases globally. The pound fell 0.3% against the dollar to $1.37915, its lowest in a week. Despite briefly breaking into positive territory it was poised for a weekly loss of 0.8%, which if sustained would be its worst since mid-June. The U.S. dollar gained 0.1% against a basket of currencies. Solid U.S. data and a shift in interest rate expectations after the Federal Reserve in June flagged sooner-than-expected hikes in 2023 have lent support to the greenback. That has dampened sterling despite signs of a hawkish turn at the Bank of England (BoE), where two rate-setters have this week mooted an early end to its bond-buying programme because of sharply higher inflation. “We are getting a change in tone from some MPC members, but we are still some way off a change in policy,” said Dean Turner, economist at UBS Wealth Management, referring to the BoE’s monetary policy committee. “As momentum switches in favour of the dollar, it will be hard for sterling to make much headway.” Turner said the pound was more likely to appreciate against the euro, given the BOE’s more hawkish stance compared with the European Central Bank, whose recent strategy review may force it to even extend asset purchases.