CAPITALDIGEST; MARKET REVIEW, 28 JUNE 2021.

  MONDAY 21/6/2021 – STERLING EDGES UP AFTER FALLING OVERNIGHT BELOW $1.38   Sterling edged higher on Monday after falling overnight to its lowest level since April as the currency remained vulnerable since the U.S. Federal Reserve surprised the market with a hawkish tone last week. The pound dropped below $1.38 against the dollar overnight, and was close to levels touched last week when the Fed signalled it would raise interest rates and end emergency bond-buying sooner than expected. At 0840 GMT, the pound re-emerged versus a weakening dollar to rise 0.3% to $1.3839, after falling to its lowest of $1.3786 since April 16. Versus the euro, it was flat at 85.91 pence, after closing on Friday after its worst week against the single currency since April. Analysts said the British currency will likely remain vulnerable in the near term. “GBP has been underperforming even the soft euro as the combination of dollar strength, rising daily COVID-19 case numbers and European politics have started to weigh,” ING analysts wrote in a note to clients. Traders are also weighing up whether the Bank of England will hike rates in 2022, ahead of the Fed. The BoE next meets on Thursday. “We wouldn’t rule this out, though for now we’re in the camp looking for the first move in early 2023,” said James Smith, Developed Markets Economist at ING, adding he doesn’t expect the BoE to unveil news on the timing of rate hikes yet. Currency markets are fully pricing in a 30 basis point hike in rates by the BoE by December 2022. Investors are also watching a dispute between Britain and the European Union over post-Brexit trade in the British province of Northern Ireland.     TUESDAY 22/6/2021 – STERLING SLIPS, HOVERING AROUND $1.39 AS DOLLAR RECOVERS   Sterling slipped against a slightly stronger dollar on Tuesday as currency markets were driven by last week’s hawkish shift from the U.S. Federal Reserve. The Fed surprised some market participants last week by signalling that it would raise interest rates and end emergency bond-buying sooner than expected – prompting the dollar to rise and riskier currencies to lose out. The pound hit a two-month low of $1.37865 early on Monday, recovered later in the session, then dipped back down again on Tuesday. At 1441 GMT, it was down 0.2% at $1.3912. Versus the euro, it was flat on the day at 85.53 pence per euro, still trading within recent ranges. Michael Hewson, chief market analyst at CMC Markets, said he expected the pound to remain driven by the dollar until a Bank of England meeting on Thursday, where a hawkish tone could serve as a catalyst for a move higher. “Where the Fed leads, generally other central banks follow … Ultimately I think the Bank of England will follow in the footsteps of the Fed,” he said. Investors are focused on reopening plans, after a full easing of lockdown in England was delayed by a month due to the more infectious Delta variant of COVID-19. Hewson said he remained bullish on the pound over the longer term, projecting it to head towards $1.45 over the next 6-12 months, because the delay in reopening did not change the fact that Britain was on the path to economic recovery.     WEDNESDAY 23/6/2021 – DOLLAR EDGES HIGHER AS FED DEBATE OVER INFLATION CONTINUES   The dollar ended higher on Wednesday as two Federal Reserve officials said that a period of high inflation in the United States could last longer than anticipated, a day after Fed Chair Jerome Powell played down rising price pressures. Atlanta Fed President Raphael Bostic said with growth surging to an estimated 7% this year and inflation well above the Fed’s 2% target, he now expects interest rates will need to rise in late 2022. Both Bostic and Fed Governor Michelle Bowman on Wednesday said that while they largely agree recent price increases will prove temporary, they also feel it may take longer than anticipated for them to fade. The dollar jumped after the Fed surprised markets on June 16 by saying that policymakers are forecasting two interest rate hikes in 2023. But Powell on Tuesday said that prices are rising due to a “perfect storm” of rising demand for goods and services and bottlenecks in supplying them as the economy reopens from the pandemic and that those price pressures should ease on their own. “Dollar gains have faded after Mr. Powell downplayed higher inflation lasting for very long,” said Joe Manimbo, senior market analyst, at Western Union Business Solutions in Washington. That said, “if we see signs of inflation pushing further higher, I think that could go some way in stirring inflation jitters all over again and putting the focus on Fed policy,” Manimbo said.     THURSDAY 24/6/2021 – DOLLAR HOLDS BELOW TWO-MONTH HIGHS AS FED POLICY IN FOCUS, STERLING SLIPS   The dollar dipped on Thursday as investors evaluated the likelihood that the U.S. Federal Reserve will be more aggressive in stamping out high inflation if it persists, while the pound weakened after the Bank of England made no changes to its monetary policy. Fed policymakers have been offering differing viewpoints on how long inflation is likely to stay high and when it will be appropriate to tighten monetary policy, after the Fed last week surprised markets by forecasting two rate hikes in 2023. The dollar has slipped since reaching two-month highs on Friday in the wake of the Fed meeting. “I do suspect we’ll have a little bit more consolidation and then some more dollar upside,” said Erik Nelson, a macro strategist at Wells Fargo in New York. “The Fed put the market on notice with regards to its inflation target and new mandate, and really just the idea that they would be completely and resolutely dovish forever … so I think there’s more room for a shakeout here,” Nelson said. The dollar fell slightly after data on Thursday showed that fewer Americans filed new claims for unemployment benefits last week as the labor market recovery from the COVID-19 pandemic gains traction amid a reopening economy. Other data showed that new orders for key U.S.-made capital goods unexpectedly fell in May, likely held back by shortages of some products. The next major U.S. economic focus will be producer price data on Friday. The dollar index was last down 0.06% against a basket of currencies at 91.733. It is holding below a two-month high of 92.408 reached on Friday.      FRIDAY 25/6/2021 – FOREX-DOLLAR DIPS, BUT WITH A WARY EYE ON U.S. INFLATION DATA ` The dollar drifted lower in Asia on Friday as an agreement on U.S. infrastructure spending underpinned appetite for riskier currencies, but caution ahead of key U.S. inflation data kept losses to a minimum. The risk-sensitive Antipodean currencies rose very slightly, while the euro gained 0.1% to $1.1940 and the yen rose by about the same margin to 110.80 per dollar. Such small moves left most of the dollar’s recent gains intact, after it was vaulted higher in the wake of a surprise shift in policy outlook from the Federal Reserve – which last week flagged sooner-than-expected interest rate rises. Inflation data due later on Friday will offer the latest indication of how much pressure the Fed is under to move, as will labour market figures due in a week’s time – leaving traders unwilling to sell the dollar too hard just in case it bounces again soon. “The dollar can jump if inflation surprises to the upside,” said Joe Capurso, head of international economics at the Commonwealth Bank of Australia in Sydney. “Upside inflation surprises have been the trend in the U.S. recently,” he added.