CAPITALDIGEST, MARKET REVIEW. 21 MARCH 2022

MONDAY 14/3/2022 – STERLING REBOUNDS AFTER HITTING 16-MONTH LOW The British pound eked out gains against the U.S. dollar on Monday, recovering after falling to a 16-month low, as tentative hopes for progress in talks between Russia and Ukraine dampened demand for U.S. currency and other safe assets. The market was also looking to policy announcements from the Bank of England and U.S. Federal Reserve later this week. Remarks from Ukrainian and Russian officials that progress in diplomatic talks could be established in the coming days helped the pound’s recovery, according to Rabobank. “This has led to a modest reduction in demand for safe haven assets and allowed cable to pull away from its earlier lows,” Rabobank said. Sterling fell to as low as $1.3013 against the dollar, its lowest level since November 2020, before paring losses to trade 0.2% higher at $1.3061. Against the euro, sterling was down 0.3% at 83.99 pence. Both the BoE and Fed are seen raising their main interest rates by 25 basis points at their respective meetings this week. Money markets are currently pricing in 163 basis points of monetary tightening from the Bank of England this year, equivalent to at least six 25 basis point rate increases. ING thinks the market pricing is too aggressive but doesn’t see the central bank scaling back market expectations for rate rises this week as it might favour a stronger pound. “Thursday may be too soon for the BoE to manage tightening expectations substantially lower,” ING said.   TUESDAY 15/3/2022 – DOLLAR FIRMS AS OIL PRICES MODERATE, TAKING MOMENTUM FROM EURO The U.S. dollar index recovered after falling on Tuesday as volatile oil prices impacted the euro and markets grappled with the significance of talks between Russia and Ukraine and indications that COVID lockdowns will crimp economic growth in China. The dollar index against major currencies was up less than 0.1per cent in the New York afternoon as markets awaited statements on Wednesday from the U.S. Federal Reserve after a meeting on monetary policy. The euro was last down less than 0.1per cent to $1.0933 after having been up nearly 0.5per cent. The British pound was up 0.2per cent to $1.3027.The Japanese yen continued trading at its weakest levels to the dollar in five years as the greenback gained 0.1per cent to 118.335 yen. The dollar index had lost nearly 0.5per cent overnight after oil prices fell below $100 a barrel, bolstering the euro. The index recovered after oil turned up from a low for the day and was last at $99.14, up 3per cent since Russia invaded Ukraine on Feb. 24.   WEDNESDAY 16/3/2022 – DOLLAR FALLS AS HAWKISH FED DELIVERS WITHOUT AN EXTRA KICK The dollar fell on Wednesday after the U.S. Federal Reserve moved to a hawkish monetary policy but without delivering a tougher surprise that might have added to its weeks-long momentum. The dollar index , which had gained 3% since the start of the Russia-Ukraine war on Feb. 24 and 10% since May, fell as much as 0.6% on Wednesday as traders parsed Fed statements following a two-day meeting. “There were no additional hawkish surprises,” said Erik Bregar of Silver Gold Bull Inc, adding that traders seemed to have been expecting too much more from the Fed. “That explains why some of these hawkish bets are being pared back a bit,” he said.   THURSDAY 17/3/2022 – EURO RISES TO ONE-WEEK HIGH ON HOPES FOR PROGRESS IN UKRAINE PEACE TALKS The euro was higher on Thursday on hopes for progress in talks between Russia and Ukraine, while the Federal Reserve decision to raise rates and tackle inflation aggressively failed to affect the market as the bar for a hawkish surprise was high. New Fed projections showed policymakers ready to shift their inflation fight into high gear; most of them see the federal funds rate rising to a range between 1.75per cent and 2per cent by the end of 2022. “Considering the very hawkish FOMC meeting, yesterday’s market reaction was not particularly impressive, indicating that investors were already pricing in a rather aggressive hiking cycle,” Unicredit analysts said. The dollar index, which measures its strength against six trading currencies, fell 0.3per cent. “The U.S. forward curve had already incorporated a heavy degree of tightening before the FOMC meeting, which may slow the intensity of further USD appreciation,” they added. Amid unrelenting fighting between Russia and Ukraine, both sides have spoken of progress at peace talks. Moscow said negotiations resumed on Thursday by videolink for a fourth straight day, discussing military, political and humanitarian issues.   FRIDAY 18/3/2022 – STERLING FLAT VERSUS DOLLAR AS MARKETS DIGEST RATE MOVES The British pound was little changed against the U.S. dollar but rose against the euro on Friday, a day after the Bank of England increased its interest rate for the third consecutive meeting but softened its language over future tightening plans. Sterling was flat against the dollar at $1.3135 but was still on track for its first positive week in four. Against the euro, the pound rose 0.1% to 84.23 pence but was still heading for its second consecutive weekly loss versus the single currency. The Bank of England followed the U.S. Federal Reserve in raising rates this week but analysts at Bank of America think that the differing message from the two central banks will fail to provide support to the pound. “The contrast in tone between the Fed and Bank of England could not be starker and goes to the heart of why we think that UK rate hikes will not provide a boost to GBP,” Bank of America said. Money markets are pricing in another 116 basis points of tightening from the BoE and 162 basis point of tightening from the Fed by the end of the year. With some semblance of clarity provided by the major central banks, attention is set to return to geopolitical developments. “With three major central bank decisions now behind us, the market is likely to revert to trading headline risk and geopolitics,” Bank of America added.