CAPITALDIGEST MARKET REVIEW, 24/10/2022

STERLING WEAKENS AS INFLATION RETURNS TO 40-YEAR HIGHS The pound fell on Wednesday after data showed surging food prices pushed British inflation into double digits last month, leaving investors to weigh up the outlook for interest rates after the scrapping of most of the government’s “mini-budget”. At 0845 GMT, the pound was down 0.4% against the dollar at $1.12750 pence, and down 0.18% versus the euro at 87.220 pence <> Wednesday’s CPI data showed the consumer price index (CPI) increased by 10.1% in annual terms in September, in a new blow for households grappling with a cost-of-living crisis.”The UK CPI was a little firmer than expected, but the impact on GBP was limited and if anything on the downside. Rising UST (U.S. Treasury) yields are dragging the greenback higher across the board, including against GBP,” said Mizuho senior economist Colin Asher. The inflation numbers continue a turbulent week for the currency, after Jeremy Hunt on Monday scrapped most of Prime Minister Liz Truss’s planned tax cuts and shortened her huge energy price cap plan to six months from two years. FOREX-DOLLAR RIDES SURGE IN TREASURY YIELDS, YEN TREADS NEAR KEY 150 LEVEL The dollar loomed over major peers on Thursday as Treasury yields peaked at multi-year highs, while the yen tumbled to a fresh 32-year low and kept markets on high alert for any signs of an intervention. Scorching inflation prints from Britain, Canada and New Zealand this week also showed that central banks across the globe are far from taming decades-high inflation even at the expense of stifling growth, stoking recession fears and fuelling demand for the safe haven dollar. Against the rising greenback, the yen again breached a new 32-year low. The pound, the euro and the antipodean currencies were likewise all suffering losses in early Asia trade The U.S. dollar index was up 0.05% to 113.04, after a nearly 1% surge overnight. The benchmark U.S. 10-year Treasury yield rose to 4.148%, its highest level since mid-2008, while the two-year Treasury yields touched a 15-year high of 4.58%. STERLING WEAKENS AS TRUSS CLINGS TO POWER, MARKETS DIAL BACK RATE-HIKE BETS Sterling weakened on Thursday as political chaos unfolded in the UK and as a Bank of England official’s comments prompted a further scaling back of bets on a full percentage-point November rate hike. British Prime Minister Liz Truss battled to retain her grip on power, a day after a second top minister quit and rowing and jostling broke out among her lawmakers in parliament. Against this backdrop, the pound fell 0.4% to $1.1179 . The pound was also down 0.4% versus the euro at 87.45 pence after briefly touching a one-week low at 87.57 pence. “The somewhat chaotic political scenes we are seeing are weighing on sterling to a degree, evidenced by the fact that cable (sterling/dollar) has traded down from around the 1.14 handle to just below 1.12 over the past couple of days,” said Stuart Cole, head macro economist at Equiti Capital. “But the big supporting factor is that, despite the political chaos, underlying economic policy is seen as being in safe hands with Jeremy Hunt as Chancellor.” After only six weeks in the role, Truss’s premiership has seen a bond market rout and a U-turn on almost all of her fiscal policy programme. FOREX-STERLING DIPS AFTER TRUSS RESIGNS, FRAGILE YEN WEAKENS PAST 150 LEVEL Sterling edged lower on Friday as investors digested the news that British Prime Minister Liz Truss had quit after just six weeks in office, while the Japanese yen languished near a fresh 32-year low. The pound dipped 0.21% to $1.1215 in early Asian trade, after a brief rally to a high of $1.1338 in the previous session after Truss announced her resignation. “I think that was a knee-jerk reaction to at least a temporary easing of UK political uncertainty… I think markets for now are pretty happy about the news,” said Carol Kong, currency strategist at Commonwealth bank of Australia (CBA). “But the news that we heard only removed some, but not all of the political uncertainty in the UK economy, and we’ll still hear more on the fiscal policy front at the end of this month.” Truss was brought down by an economic programme that sent shockwaves through markets and shattered the country’s reputation for financial stability. The Conservative Party, which holds a big majority in parliament and need not call a nationwide election for another two years, will now elect a new leader by Oct. 28 – Britain’s fifth prime minister in six years. FOREX-DOLLAR PARES GAINS AS FED RATE HIKE PLAN REMAIN IN FOCUS The U.S. dollar pared gains against a basket of currencies on Friday after a report said some Fed officials have signalled greater unease with big interest rate rises to fight inflation, even as they line up another big rate hike for November. The Wall Street Journal reported that Fed officials are barrelling toward another interest-rate rise of 0.75 percentage point at their November meeting, while some policymakers have begun signalling their desire to slow down the pace of increases soon. Fed officials are likely to debate then whether and how to signal plans to approve a smaller increase in December, the report said. The dollar index =USD, which measures the greenback’s strength against a basket of currencies, was 0.2% higher at 113.2, down from a 3-week high of 113.95, hit earlier in the session.