CAPITALDIGEST MARKET REVIEW, 24/06/2024

STERLING FIRMS VERSUS EURO AND DOLLAR AFTER UK INFLATION DATA

Sterling rose after UK data showed that underlying price pressures remained strong, meaning the Bank of England is likely to wait longer before cutting interest rates. British inflation returned to its 2% target in May for the first time in nearly three years, while the closely-watched services prices rose by 5.7%. Markets priced in a 30% chance of a BoE first cut by August from around 50% before the data, while expecting 44 bps of monetary easing in 2024 from almost 50 bps before the data. The euro fell 0.20% to 84.32 pence against the pound, which was up 0.16% at $1.2730. It was flat right before the release of inflation data. “For now, we are sticking with our forecast that the bank will first cut interest rates from 5.25% in August, although that relies on better news on services CPI inflation and wage growth in the coming months,” said Ruth Gregory, deputy chief economist at Capital Economics. Data last week showed British wages picked up more quickly than forecast. “The big question is whether the bank sticks to previous guidance and primes the market for an August kick-off to a rate-cutting cycle,” said Jamie Dutta, market analyst at Vantage, after forecasting no decision on rates by the BoE on Thursday. “Keeping policy restrictive for ‘an extended period’ is the key phrase to watch. “Of course, before we get to that point, there is the general election on July 4, which may preclude any significant changes to forward guidance at this meeting,” he added.

 DOLLAR EXTENDS GAINS AGAINST YEN WITH US ECONOMIC STRENGTH IN FOCUS

The dollar rose to a seven-week high against the yen on Thursday, while the sterling and euro fell amid on the U.S. economy is coming off the boil while traders watch for more data bolstering the case for a Federal Reserve rate cut this year. May retail sales released this week were tepid and the labor market appears to be weakening. The number of Americans filing new claims for unemployment benefits fell last week, but was still more than expected, data released on Thursday showed, indicating the jobs market remained strong despite a gradual cooling. “U.S. (purchasing managers’ index) tomorrow could provide more of a catalyst for a higher volatility day, so we’ll be keeping our eyes on that to wrap up the week,” said Helen Given, associate director of trading at Monex USA, in Washington. The dollar hit its highest since April 29 against the yen and was last up 0.51% at 158.89 yen in New York trading. Traders remain on alert for signs of continued intervention by the Bank of Japan to boost a currency that hit 34-year lows in late April. Yen markets have been rattled since a dovish Bank of Japan last week maintained its policy target and said it intends to soon release a plan to trim bond buying. “I think the market was kind of disappointed in the Bank of Japan’s actions. It felt a bit like kicking the can down the road again for the yen for the market,” said Amo Sahota, director, Klarity FX, in San Francisco

POUND GETS SMALL LIFT FROM RETAIL SALES

The pound briefly edged up on Friday, after data showed UK retail sales beat expectations in May, offering some comfort about the resilience of the British consumer a day after the Bank of England paved the way for a possible August rate cut. A separate release on UK public finances painted a more downbeat picture, which could weigh on gilt prices and, ultimately, sterling. Sterling rose to a session high of $1.2675 shortly after the retail sales numbers, before nudging back to $1.2669, up 0.1% on the day and heading for a third weekly decline of 0.3% The BoE on Thursday left interest rates unchanged at a 16-year high of 5.25%, as expected. Some policymakers said the decision to leave rates where they are was “finely balanced”, a sign economists took to mean the prospect of a future rate cut has now moved closer. On Friday, British retail sales volumes rose 2.9% in May, rising sharply from a revised 1.8% fall in April when heavy rain kept shoppers away, the Office for National Statistics. Economists polled by Reuters had on average forecast sales volumes would increase by 1.5% on the month. Against the euro , the pound pared some losses, leaving the single European currency at 84.60 pence. Kathleen Brooks, research director at trading platform XTB, said the rise might be down to the so-called ‘Taylor Swift effect’ – where economic activity in numerous locations around the world has reflected the pop icon’s sold out Eras tour.

SOUTH AFRICAN RAND WEAKENS, FOCUS ON CABINET ANNOUNCEMENT

The South African rand was weaker in early trade on Monday, as markets awaited President Cyril Ramaphosa’s cabinet announcement after the African National Congress lost its parliamentary majority in an election last month, the first time in 30 years. At 0556 GMT, the rand traded at 18.0075 against the dollar , about 0.22% weaker than its previous close. Nine parties have joined the ANC in a government of national unity (GNU), including the pro-business Democratic Alliance, and all eyes will be on Ramaphosa’s cabinet announcement expected this week. Ramaphosa said in his weekly newsletter to the nation on Monday that South Africans wanted the elected representatives “to put aside narrow interests and work together to build the country”. “The GNU cannot be preoccupied with jockeying for positions, tussles over appointments or squabbles within and between parties.” The cabinet announcement could provide direction for the country’s financial markets. Ramaphosa added that the government’s the top priority was economic growth to create jobs. South Africa’s benchmark 2030 government bond was weaker in early deals, with the yield up 4 basis points to 9.725%

DOLLAR STEADY; YEN WOBBLES NEAR 160 AS INTERVENTION WORRIES LINGER

The dollar was steady on Monday ahead of a fresh U.S. inflation reading that will likely influence the interest rate outlook, while the yen languished near the 160 level, drawing verbal warnings from Japanese authorities as intervention fears grip markets. The yen weakened to 159.94 per dollar in early trade on Monday, its lowest since April 29, when the yen touched a 34-year low of 160.245 leading to Japanese authorities spending roughly 9.8 trillion yen to support the currency. The yen was last slightly firmer at 159.70 per dollar after Japan’s top currency diplomat Masato Kanda said on Monday authorities will take appropriate steps if there is excessive foreign exchange movement, and that the addition of Japan to the U.S. Treasury’s monitoring list would not restrict their actions. “We will firmly respond to moves that are too rapid or driven by speculators,” Kanda said, but noted authorities have no specific levels in mind on when to intervene. The yen has come under renewed pressure after the Bank of Japan’s (BOJ) decision this month to hold off on reducing bond-buying stimulus until its July meeting. It is down 1.4% in June. “It’s pretty remarkable despite expectations of further BOJ policy tightening dollar/yen continues to creep higher and is now back up to 160,” said Carol Kong, currency strategist at Commonwealth Bank of Australia. A summary of opinions at the BOJ’s June policy meeting on Monday showed some policymakers called for raising interest rates in a timely fashion as they saw a risk of inflation overshooting expectations.