CAPITALDIGEST MARKET REVIEW 22 AUGUST 2021

MONDAY 16/8/2021 – STERLING SLIPS AS GLOBAL RISK APPETITE FALTERS; SPECULATORS TURN BULLISH The British pound slipped against the dollar and was little changed against the euro on Monday, with risk appetite in global markets weak after economic data from the United States and China stirred concern about their recovery from COVID-19. Data on Friday showing a plunge in U.S. consumer confidence and data on Monday showing a sharp slowdown in China’s factory output and retail sales growth spooked investors, pausing the 10-day winning streak in European stocks. The dollar edged higher and riskier currencies generally lost out. At 1544 GMT, the pound was down 0.1% against the dollar, at $1.3853. Versus the euro, it was steady at 85.065 pence per euro. Against the safe-haven Japanese yen, the pound was down 0.6%, having touched its lowest level in more than three weeks. As well as being driven by shifts in global risk appetite, a busy week for domestic data is also expected to affect the pound. Focus is on the UK labour market report on Tuesday, inflation data for July on Wednesday and retail sales data on Friday. Earlier in August the Bank of England set out plans for how it would start to wind down its massive bond-buying programme. Since then the pound has generally slipped versus the dollar but strengthened slightly versus the euro, as the European Central Bank is not expected to tighten policy as soon as the BoE. “The recent hawkish tilt by the Bank of England has given the pound an added buoyancy recently, and some decent numbers this week could act as a tailwind for GBP bulls, after recent weakness,” Michael Hewson, chief market analyst at CMC Markets, said in a note to clients.   TUESDAY 17/8/2021 – DOLLAR GAINS FOR 2ND DAY ON AFGHANISTAN, DELTA VARIANT WORRIES The dollar advanced for a second straight session on Tuesday, bolstered by safe-haven demand, as investors fretted about Afghanistan, a slowing Chinese economy, and the rapid spread of the Delta coronavirus variant which forced some lockdowns. The overall tone in financial markets was one of caution, with shares on Wall Street in the red. A much sharper decline than expected in Tuesday’s U.S. retail sales curbed gains in the dollar, but that was offset by the higher-than-forecast rise in industrial production, which accelerated the greenback’s gains. “This morning’s retail sales report served to confirm that the U.S. consumer – the world’s biggest and most dependable customer – is becoming more cautious,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. “This, combined with evidence of a slowdown in the Chinese economy and ongoing political turmoil in Afghanistan, is driving investors to pay off dollar-funded borrowing positions and pull money out of high-risk markets,” he added. The Afghan Taliban said on Tuesday they wanted peaceful relations with other countries and would respect the rights of women within the framework of Islamic law, as they held their first official news briefing since their shock seizure of Kabul. Many investors, however, were not comforted by the Taliban’s conciliatory tone. In afternoon trading, the U.S. dollar index rose 0.6% to 93.119. The euro, the biggest component in the dollar index, fell 0.6% to $1.1709. The New Zealand dollar, meanwhile, tumbled to its lowest in three weeks after the country identified its first COVID-19 case since February, prompting the government to announce new short-term lockdown measures. The currency fell sharply earlier in the global session after Prime Minister Jacinda Arden said Auckland – where the case was reported – would go into lockdown for seven days, while New Zealand as a whole will have the toughest level of lockdown for three days. It was last down 1.7% at US$0.6904, after dropping to US$0.6900, the lowest since late July.   WEDNESDAY 18/8/2021 – STERLING HOVERS NEAR RECENT LOWS, UNMOVED BY INFLATION SLOWDOWN Sterling hovered near a 3-1/2-week low on Wednesday after UK inflation data showed a sharper slowdown than expected. The pound was little moved by the numbers, however. Investors believe it will have little bearing on the rising trend for inflation, and the currency fell on Tuesday after a jump in the dollar. Analysts said investors were focused more on the state of the labour market — a key determinant of future inflation — as a guide to when the Bank of England will tighten monetary policy than on current inflation rates. Derek Halpenny at MUFG said Wednesday’s strong labour market data was “perhaps more important as it revealed another strong print that in our view reinforces the prospect of a rate hike cycle commencing in the second half of next year.” The pound was last at $1.3742, down 0.1% on the day and close to Tuesday’s level of $1.3726, the lowest since July 23. Against the euro, the British currency dropped 0.1% to 85.32 pence. British inflation fell to the Bank of England’s 2% target last month, a slowdown that economists said was most likely a blip as the reopening of the economy after lockdown drives prices higher. Economists polled by Reuters had expected the data to show a 2.3% rise in consumer prices in July following a 2.5% rise in June. (Reporting by Tommy Wilkes, Editing by Timothy Heritage)   THURSDAY 19/8/2021 – U.S. DOLLAR SCALES 9-MONTH PEAK ON FED TAPER OUTLOOK, DELTA VARIANT The U.S. dollar rose to a nine-month high on Thursday, as worries about widespread coronavirus infections and Federal Reserve meeting minutes showing it was considering reducing pandemic-era stimulus this year hit global stocks and commodity-linked currencies. The dollar index =USD, which measures its performance against six currencies, hit 93.587, its highest since early November of last year. It was last up 0.3% at 93.359. A decline in debt purchases by the Fed is widely considered positive for the dollar as it is expected to raise U.S. government bond yields, making it more attractive for investors to hold dollar-denominated assets. The minutes of the Fed’s July meeting showed officials largely expect to reduce their monthly bond buying later this year, but consensus on other key issues appeared elusive, including the timing of the start of the taper and whether inflation, joblessness or the coronavirus pandemic pose a bigger risk to economic recovery.   FRIDAY 20/8/2021 – POUNDS FALLS TO ONE-MONTH LOW AS EDGY INVESTORS BUY DOLLARS Sterling touched a new one-month low against a robust dollar on Friday and also slipped to a one-month low against the euro as global risk aversion propelled investors towards currencies considered safer. Risk currencies such as sterling have taken a knock this week on worries that the Delta coronavirus variant could derail the global recovery, boosting demand for the safe-haven dollar. Concerns that major central banks such as the U.S. Federal Reserve will begin tapering emergency stimulus just as growth slows has also undermined risk sentiment. Data released on Friday showed British retail sales unexpectedly fell sharply last month, but analysts said the pound was more likely to be driven by global risk sentiment than by the UK data. Retail sales volumes dropped by 2.5% in July from June, official data showed. A Reuters poll of economists had pointed to a 0.4% month-on-month increase in July sales. The British pound was last trading at $1.3623, having touched a fresh one-month low at $1.3614. For the week, sterling was down almost 1.8% and set for its biggest fall against the greenback in two months. Sterling also fell to a one-month low against the euro at 85.82 pence and was marginally lower on the day. It has weakened almost 0.9% versus the common currency this week, which means it is on track for its biggest weekly drop since early April, according to Refinitiv data. “With the markets priced for Bank of England action in 2022 certainly the pound will remain vulnerable to an extension of risk-off that starts to result in investors questioning the ability of G10 central banks to raise rates at all,” Derek Halpenny, head of research, global markets EMEA at MUFG, said in a note. “But we don’t think we are at that juncture yet.”