CAPITALDIGEST MARKET REVIEW, 26 JULY 2021

MONDAY 19/7/2021 – STERLING DROPS TO THREE-MONTH LOW ON ‘FREEDOM DAY’ Britain’s so-called Freedom Day saw the pound fall to a three-month low in early trading on Monday, as a cautious tone in global markets meant riskier currencies lost out in favour of the safe-haven dollar. Britain is facing a new wave of Covid-19 cases, but Prime Minister Boris Johnson is lifting most restrictions in England in what some have dubbed Freedom Day. Mr Johnson has urged the public to remain cautious. Last week, the pound had its worst week in a month versus the dollar, and this downward turn continued on Monday with sterling hitting $1.37125 at 0710 GMT, its lowest since 13 April. Versus the euro, the pound was down 0.2% at 85.90 pence. Global markets showed signs of investors’ risk-aversion, as stocks fell and safe-haven currencies gained. Analysts cited fears of inflation and concern about the Delta variant of the coronavirus as the main drivers behind the cautious turn. London’s FTSE 100 was at a two-month low. “The world will be watching the UK experiment with huge interest,” wrote Deutsche Bank strategist Jim Reid in a note to clients. “It could show a pathway back towards normality or it could be a warning to even heavily vaccinated countries that Covid will be a problem for a decent length of time still.” Britain has the seventh highest death toll in the world and is forecast to soon have more new infections each day than it did at the height of the second wave of the pandemic. But it is ahead of its European peers in terms of vaccine rollout.   TUESDAY 20/7/2021 – POUND HITS MORE THAN 5-MONTH LOWS AS UK COVID-19 CASES SURGE Pound hit a more than five-month low against the dollar and traded close to a five-week low against the euro on Tuesday, as broad demand for the safe-haven dollar amid a global surge in coronavirus infections kept investors jittery. England lifted all COVID-19 social restrictions on Monday, in what local media dubbed “Freedom Day”, although looming over the end to lockdown measures was a surge in infections caused largely by the highly contagious Delta variant of the virus. COVID-19 restrictions are being implemented again in European countries after recent spikes. The global tick-up in infections sparked concern among investors at the start of the week, forcing a sell-off in stock markets and a bid for bonds and the dollar, which spurred a sharp move lower in growth-correlated currencies such as the pound. By 1450 GMT on Tuesday, sterling was 0.5% lower against the dollar at $1.3604, having hit a more than five-month low of $1.3628 in early London deals. It traded flat on the day against the euro at 86.36 pence. Freedom Day comes sometime after opening the post-pandemic floodgates which led to a surge in UK economic sentiment, which suggests much of the ‘good news’ has been priced in,” said Bilal Hafeez, CEO of Macro Hive. “With the rising dollar, do not be surprised to see GBP/USD correct to around $1.34 or $1.35 levels in the coming months as the market looks at the rising infection rates for indication of economic impact.”   WEDNESDAY 21/7/2021 – U.S. DOLLAR SLIPS AS RISK SENTIMENT PICKS UP, BUT KEEPS POSITIVE OUTLOOK The safe-haven dollar on Wednesday pulled back from more than three-month highs as risk appetite made a comeback with stocks higher, although investors remained cautious amid inflation fears and concerns about the highly-contagious coronavirus variant. Another safe haven, the Japanese yen, was also down against the dollar, as risk aversion eased. The Delta variant of the coronavirus, which has caused a surge in infections worldwide, rose to the top of investor concerns along with inflation this week, prompting global stocks to drop sharply on Monday. European equity markets though picked up on Wednesday and Wall Street shares rose as well. In afternoon New York trading, the dollar index, a measure of its value against six major currencies fell 0.2% to 92.755. On Tuesday, the index hit a more than three-month high. Market participants though remained bullish on the dollar’s outlook, at least over the next few months. “Between yield differentials and COVID-driven safe-haven demand, the U.S. dollar has been the proverbial belle of the forex ball this week,” said Matt Weller, global head of market research at FOREX.com and City Index. “These themes should continue to support the dollar in the coming weeks, but a recovery in the market’s risk appetite, especially if driven by additional monetary or fiscal stimulus from the U.S., would undercut the nascent trend of strength in the greenback,” he added. The Federal Reserve’s stimulus measures or quantitative easing have restrained the dollar as it increased the currency’s supply in the financial system. “Currently, we have high inflation in the U.S. which is keeping the door open for the Fed to taper stimulus,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington, a scenario that’s positive for the dollar. Against the yen, the dollar rose 0.4% to 110.26.   THURSDAY 22/7/2021 – EURO HOVERS NEAR 3-1/2-MTH LOW, ANTICIPATES DOVISH ECB The euro traded just off 3-1/2  month lows versus the dollar on Thursday before a potentially momentous meeting of the ECB, while growth-focused currencies such as the Australian dollar gained as a global risk sell-off abated further. The U.S. dollar index and the yen which rose earlier this week to the highest since early-April and end-May respectively, retreated as strong earnings lifted stock markets and bond yields, and induced investors to trickle out of the safe-haven assets they had piled into. They also bought back into cryptocurrencies, with bitcoin rising further above the $30,000 mark, especially after Tesla CEO Elon Musk said the company would “most likely” resume accepting bitcoin for payment. No new measures are anticipated from the European Central Bank but following on from the inflation target tweak, odds have risen on policymakers promising to retain support for longer and even to add more bond-buying. The ECB’s dovish pivot at a time when many peers are mulling exiting pandemic-era stimulus is expected to keep the single currency under pressure. It delivers its decision at 1145 GMT and ECB president Christine Lagarde holds a news conference at 1230 GMT. The euro traded at $1.1790 by 1100 GMT, just off the early April lows of $1.1752 touched on Wednesday. “A lot of what happens today with the ECB hinges on just how much of an inflation-averaging central bank Lagarde and the press conference portray them as,” said Stephen Gallo, European head of FX strategy at BMO Capital Markets. “The more they look willing to tolerate a significantly higher rate of inflation, the more negative it will be for the euro, bullish for commodity and emerging market currencies versus the euro.”   FRIDAY 23/7/2021 – STERLING DIPS AS COVID CAUTION CREEPS IN Sterling fell on Friday despite better-than-expected retail sales data as investors weighed up the risk of a further rise in COVID-19 cases and the impact of self-isolation on Britain’s food and travel industries. Still, the pound has proven relatively resilient this week to a broader selloff in many currencies — it is now nearly flat against the dollar — on the back of concerns about the spread of the Delta variant of the coronavirus. Official data on Friday showed British retail sales resuming their post-lockdown recovery in June after a surprise fall in May. Retail sales rose by 0.5% in June from May — a Reuters poll of economists had pointed to a 0.4% month-on-month increase in retail sales volumes in June. The government said on Thursday daily testing would be rolled out to allow staff in key sectors to keep working instead of having to self-isolate automatically after exposure to someone who had tested positive for COVID-19 – a system that has caused huge disruption. By 0750 GMT, the pound was 0.2% lower versus the dollar at $1.3737, and down my a similar magnitude against the euro at 85.71 pence per euro. MUFG analyst Derek Halpenny said he remained positive on sterling but that appetite for short-term buying was limited as investors wait to see whether there has been a decisive break in the link between rising COVID-19 cases and hospitalisations thanks to Britain’s rapid vaccine rollout. “We remain GBP bullish over the medium-term but that view incorporates assumptions like COVID risks receding and the NI (Northern Ireland) protocol issue being resolved,” he said, referring to the dispute between the United Kingdom and the EU over post-Brexit trading arrangements for Northern Ireland.