CAPITALDIGEST, MARKET REVIEW. 1ST AUGUST 2022

MONDAY 25/7/2022- POUND STRUGGLES AROUND $1.20 ON ECONOMY WORRIES Sterling held around the $1.20 level versus the U.S. dollar on Monday as traders worried about the outlook of the British currency after recent dismal data before a widely expected U.S. interest rate hike this week. Versus the U.S. dollar, the pound held around $1.2040, a shade below Friday’s high of $1.2064 which was the highest level in nearly three weeks. It briefly rose half a percent to the day’s highs at $1.2085 before retracing its gains. Against the euro, the pound was steady at 85.02 pence. “The UK post-pandemic recovery is lagging rest of the G10 economies and inflation is likely to prove stickier due to Brexit, complicating further BoE’s policy,” Citibank strategists said in a client note. Britain’s businesses grew at their slowest pace in 17 months in July and inflation pressures eased, according to an industry survey last week. Britain’s economy is feeling the strain of inflation which is on course to hit double digits, driven in large part by sky-rocketing fuel prices. TUESDAY 26/7/2022 – DOLLAR FALLS AFTER FED HIKE, POWELL COMMENTS The dollar fell on Wednesday against a basket of major currencies after the U.S. Federal Reserve raised interest rates by 75 basis points, as was widely anticipated, and comments from Fed Chair Jerome Powell spurred hopes for a slower hiking path. The central bank raised rates by three-quarters of a percentage point for the second straight meeting as it attempts to rein in inflation, but noted that while the labor market remains strong, other economic indicators have softened. “You certainly can view the policy statement as hawkish but it is pretty consistent with what they have been saying for the last couple of meetings – they are going to continue to hike – estimates had them going into restrictive territory, they are at neutral now and they continue to think they are going to need to go into restrictive territory,” said Marvin Loh, senior global market strategist at State Street in Boston. “Theoretically, the dollar should be stronger in an environment where it is hawkish but it was as expected and we have had a lot of movement in the dollar so far this month.” The greenback initially moved higher after the statement but quickly reversed course, and weakened further along with Treasury yields while U.S. stocks rallied as comments from Fed Chair Jerome Powell after the policy statement were seen as dovish. WEDNESDAY 27/7/2022 – STERLING FIRM BUT HELD BACK BY WEAK DATA, FED The British pound edged higher on Wednesday thanks to a broadly sturdy dollar but gains were capped by a fresh slate of weak data highlighting the problems facing the economy. Gains were also capped ahead of the outcome of a two-day U.S. Federal Reserve meeting where policymakers are widely expected to raise interest rates by 75 bps. British employers are feeling the most pessimistic about hiring and investment since the depths of the coronavirus pandemic crisis in 2020, while shops and supermarkets in Britain increased prices by 4.4% in the 12 months to July, the largest rise in more than a decade. read more A raft of weak economic data has put pressure on the Bank of England to soften its monetary policy tightening path. While economists in a Reuters poll expect the central bank to raise interest rates by 25 bps next week, some analysts expect a bigger 50 bps hike. read more “Data for the month of July confirm the slowdown in real demand and that might make the (BoE) policy announcement a more finely balanced one,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets. Versus the U.S. dollar , the pound edged higher to $1.2025 and was steady versus the euro at 84.13 pence. THURSDAY 28/7/2022- DOLLAR NURSES LOSSES VS YEN AS TRADERS DUMP RATE DIFFERENTIAL TRADES The U.S. dollar slumped to a three-week low versus the Japanese yen and struggled against its other major rivals on Thursday as markets ramped up bets on a softening in the pace of rate hikes. While Federal Reserve Chair Jerome Powell delivered a widely expected 75 bps hike in interest rates, it altered its statement to cite some softening in recent data and dropped its commitment to guide markets on the future trajectory of interest rates. The dollar’s weakness was the most prominent against the yen JPY=EBS with the greenback slumping nearly 1% versus the Japanese unit to hit its lowest since early July at 135.10 yen. The yen was the primary recipient of the widening interest rate differential trade between the United States and its global peers. Speculation is now building that the dollar may have peaked if the pace of tightening slows in September after consecutive 75bp moves in June and July, said Kenneth Broux, an FX strategist at Societe Generale in London. FRIDAY 29/7/2022 – DOLLAR SLIDES AS MIXED U.S. DATA HIGHLIGHTS UNCERTAIN PATH The dollar dropped to a three-week low in choppy trading on Friday, as investor concerns about recession outweighed inflation worries, for now, amid a mixed batch of economic data. There was also a lot of month-end position-squaring, analysts said. Earlier, U.S. economic numbers showed that inflation continued its red-hot rise in June, keeping the Federal Reserve on track to raise interest rates as aggressively as it deems necessary. The personal consumption expenditures (PCE) price index jumped 1.0% last month, the largest increase since September 2005 and followed a 0.6% gain in May. In the 12 months through June, the PCE price index advanced 6.8%, the biggest gain since January 1982. Excluding the volatile food and energy components, the PCE price index shot up 0.6% after climbing 0.3% in May