CAPITALDIGEST MARKET REVIEW. 21, JULY, 2021.

MONDAY 14/5/2021 – DOLLAR STEADY AS FED MEETING LOOMS; BITCOIN POPS ABOVE $40,000  The dollar was little changed against a basket of major currencies on Monday as traders awaited a much-anticipated U.S. Federal Reserve meeting later this week that might signal a change in the outlook for U.S. monetary policy. settled in tight ranges with implied volatility plumbing to multi-year lows after last week’s strong inflation readings and a dovish European Central Bank meeting failed to dislodge currencies from recent trading levels. “It’s all about the FOMC this week, and we’ll be watching to see exactly how much taper talk has really been going on and if it has any impact on the medium term outlook,” Brad Bechtel, global head of FX at Jefferies, said in a note. The dollar index, which measures the greenback against a basket of six currencies, was about flat on the day at 90.512. Last week the index rose 0.4%, its largest weekly change in five weeks. Muted FX moves in recent weeks crushed the Deutsche Bank FX Volatility Index down to 5.6 on Friday, its lowest in nearly 16 months. Against the yen the dollar rose 0.38% to a more than one-week high of 110.09 yen. “A modest uptick in Treasury yields has been supportive of the rate-sensitive pairing,” said Ronald Simpson, managing director, global currency analysis at Action Economics.  TUESDAY 15/6/2021 – STERLING HOLDS STEADY, UNAFFECTED BY REOPENING DELAY; UK EMPLOYEE NUMBERS JUMP  The pound was steady in early London trading on Tuesday, holding firm above $1.41 and showing no reaction to a delay in the UK’s lockdown easing plan, while investors took confidence from jobs data showing a record jump in employee numbers in May. Currency markets were generally quiet ahead of the U.S. Federal Reserve meeting, which ends on Wednesday. The pound was up less than 0.1% against the dollar, at $1.41180 at 0747 GMT. Versus the euro, it was down around 0.1% at 86.03 pence per euro. Jobs data released earlier in the session showed that the number of employees on British company payrolls surged by a record amount in May as pandemic restrictions eased – though it was still more than half a million below its pre-pandemic peak. The figures also showed that wages grew at their fastest since 2007 in the year to April. “The key point in my view is the much-higher-than-expected rise in wages. This is bound to be a point of discussion at next week’s Bank of England meeting,” wrote Marshall Gittler, head of investment research at BDSwiss, in a note to clients. “It’s positive for GBP as it makes normalization of monetary policy more likely.” The Bank of England’s next policy meeting is on June 24.  WEDNESDAY 16/6/2021 – STERLING FIRMS AFTER INFLATION’S SURPRISE SURGE  Sterling firmed on Wednesday after data showed British inflation unexpectedly jumped above the Bank of England’s 2.0% target in May raising some concerns that policymakers may start signalling a shift in policy thinking if prices extend their rising streak. Inflation hit 2.1% in May, outpacing forecasts and looks set to rise further as the country re-opens its economy after its coronavirus lockdowns. Against a broadly steady dollar, the British pound rose 0.2% to $1.41090, homing in on a 2021 high of $1.4250 hit at the start of June. Against the euro, the British currency rose 0.25% to 85.94 pence. While the rise in inflation is largely driven by local factors, the Bank of England will be keenly watching whether a stronger currency will help ease price pressures. The British currency is one of the best performing currencies versus the dollar this year with a net 3.3% rise so far in 2021. “But recent comments suggest some concerns are possibly starting to seep into the MPC’s thinking regarding just how strong these downward pressures might turn out to be: if employment levels hold up as the furlough scheme ends then we could start to see the MPC’s message become increasingly less-dovish,” said Stuart Cole, head macro economist at Equiti Capital, referring to the Bank of England.  THURSDAY 17/6/2021 – STERLING DIPS BELOW $1.40 ON U.S. FED HAWKISH SURPRISE  Sterling fell below $1.40 and hit a 10-week high versus the euro on Thursday as markets reacted to a surprise hawkish shift by the U.S. Federal Reserve, boosting the dollar against other major currencies. Fed officials on Wednesday signalled they would raise interest rates and end emergency bond-buying sooner than expected, pushing U.S. Treasury yields higher and equities lower. Fed Chair Jerome Powell told a news conference “inflation could turn out to be higher and more persistent than we expect”. The pound fell 0.7% versus the dollar in late trading on Wednesday after the move, taking it below $1.40 for the first time since early May. It was last broadly flat on Thursday at $1.39840. Against the euro the pound was up 0.4% on the day, hitting 85.42 pence per euro – its highest level since early April. Lee Hardman, currency economist at MUFG, said sterling’s strength versus the euro reflected bets that the Bank of England could follow the Fed’s lead and tighten policy faster than the eurozone. “It’s a reflection of the view that the Bank of England is likely to be one of the first central banks to raise rates as well. If the Fed is willing that could give the Bank of England confidence to move earlier,” Hardman said. Currency markets are fully pricing in one 25 basis point hike in rates by the Bank of England by December 2022. Since the start of this week, rate increase expectations have also doubled for May 2022, although the market is not yet pricing in a full hike. Data on Wednesday showed inflation in Britain also unexpectedly jumped above the Bank of England’s 2% target in May. BoE officials have said they expect the surge to be temporary while the economy opens up after lockdowns.  FRIDAY 18/6/2021 – FOREX-FED-FUELLED DOLLAR FORCES RIVAL CURRENCIES ONTO BACK FOOT  The dollar was headed for its best week in nearly nine months on Friday, with rival currencies struggling to shake the pressure exerted by the Federal Reserve’s sudden hawkish shift in tone. With investors also scrambling to price in a sooner-than-expected tapering of extraordinary U.S. monetary stimulus, the euro and the yen failed to recoup losses of the last two days. Hovering around $1.19, the euro was flat against the dollar and on course for its worse week since October with a 1.6% fall. With a dovish European Central Bank seemingly far behind the Fed in the monetary policy cycle, traders will be reluctant to buy euros against dollars. “The U.S. central bank is one step ahead and as a result USD is likely to remain well supported against the EUR”, Commerzbank strategists said in their Daily Currency Briefing. “As no important data is due for publication today or at the start of next week, the FX market is likely to feel mainly the after-effects of the Fed meeting”, they added. With investors busy closing short positions since the Fed meeting, the dollar index hit a more than two-month high of 92.010, and is on track for a 1.6% weekly gain, its largest since September. At 0810 GMT, the dollar index was up 0.01% at 91.887. The greenback is also on track for a 0.4% rise against the yen, which sat at 110.02 per dollar after hitting an 11-week low of 110.82. It was little moved by the Bank of Japan keeping its main policy settings steady, as expected. Meanwhile the Australian dollar struck its lowest since December at $0.7508 and the Kiwi fell to its weakest since April at $0.6982, defying eye-popping reports on Australian jobs and New Zealand growth this week. Sterling fell 0.24% to $1.3894 and was headed for a weekly loss of 1.5%. The shakeout on foreign exchanges has been triggered by Fed forecasts, or ‘dot plots,’ showing 13 of the 18-person policy board saw rates rising in 2023, versus only six previously, with the median board member tipping two hikes in 2023.