CAPITALDIGEST, MARKET REVIEW. 28 MARCH 2022

MONDAY 21/3/2022 – FOREX-DOLLAR GAINS GROUND AFTER POWELL COMMENTS The dollar strengthened against a basket of major currencies on Monday, in the wake of comments from U.S. Federal Reserve Chair Jerome Powell that opened the door for the central bank to take a more aggressive monetary policy path. The greenback had been fluctuating between slight gains and losses earlier in the day, and weakened slightly after comments from Atlanta Federal Reserve Bank President Raphael Bostic. The policymaker said he sees six rate hikes this year and two for 2023, a more dovish stance than most of his colleagues as he has concerns about the effects of the conflict between Russia and Ukraine on the U.S. economy. But the dollar gained ground after Powell said the central bank must move “expeditiously” to bring too-high inflation under control, and will, if needed, use bigger-than-usual interest rate hikes to do so. “He keeps saying the same thing over and over, that we’ve got to get inflation down and whatever it takes that’s what we’re going to do. The market unfortunately is hanging on to old norms, that they’ll just do a quarter (of a percentage point) every time,” said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute in St. Louis. “The Fed is kind of rewriting that playbook – we may have to go every meeting, we may have to do something more than 25 basis points, and we might have to do rate hikes and quantitative tightening at the same time.”   TUESDAY 22/3/2022 – POUND JUMPS AS INFLATION FEARS MOUNT Sterling has pushed higher against the dollar and euro as investors turn their attention to new inflation data and Rishi Sunak’s Budget update to parliament. The pound rose 0.6pc against the dollar to $1.3258 – its highest in almost three weeks. Against the euro it hit a two-week high at 83.74p. The currency is continuing to recover losses since the Bank of England’s cautious interest rate increase last week. It could be given a further boost if tomorrow’s inflation figures exceed expectations and fuel bets on further interest rate rises. Traders are also focused on the Spring Statement, with the Chancellor facing calls to ease the cost-of-living crisis for British households.   WEDNESDAY 23/3/2022 – STERLING HOLDS AT 2-WEEK HIGH AFTER SPRING STATEMENT Sterling held at a two-week high against the euro and softened slightly against the dollar on Wednesday, after British finance minister Rishi Sunak announced measures to ease the UK’s cost-of-living squeeze and inflation hit a 30-year high. Against the euro, sterling steadied at 83.137 pence, , the strongest level since March 8. The pound was down 0.4% against a strengthening U.S. dollar at $1.32095. Sunak cut taxes for workers and reduced a duty on fuel against the backdrop of slowing economic growth and fast-rising inflation. The announcement came after figures showed inflation at 6.2% in February, up 5.5% in the 12 months to February 2022, more than the 5.9% rise expected by the market. Policymakers raised interest rates last week but signalled they would take a more cautious approach to policy tightening despite soaring inflation. “While the Bank of England adopted a dovish tone last week, it may find it has no option to tighten in line with the Federal Reserve if only to dilute the inflationary impulse of a weaker pound,” said Michael Hewson, Chief Market Analyst at CMC Markets UK. About 70% of wage earners will be better off according to Hewson, but whether the changes will keep track of the rate of inflation is another matter.   THURSDAY 24/3/2022 – STERLING DRIFTS LOWER AMID RESILIENT GROWTH AND SURGING PRICES Sterling traded lower against the dollar on Thursday after data showed British business activity remained buoyant in March amid surging prices. Britain’s private sector reported the steepest rise in prices charged by companies since at least 1999 while the S&P Global/CIPS composite Purchasing Managers’ Index (PMI), a gauge of economic growth, edged down just slightly to 59.7 from a historically high 59.9 in February. The data, however, didn’t change the direction of travel for the British currency which was 0.17% lower against the dollar at $1.3128. The pound recouped some early morning losses against the euro though and was flat against the common currency after hitting a two-week high on Wednesday.. “I would be wary of buying into the better headline aggressively”, commented Jeremy Stretch, head of G10 FX strategy at CIBC, noting that there were still a lot of uncertainties as to how inflation would cut into the disposable income of British consumers. British finance minister Rishi Sunak cut fuel duty and softened some of a looming payroll tax increase on Wednesday as he sought to alleviate a severe cost-of-living squeeze against the backdrop of slowing economic growth.   FRIDAY 25/3/2022 – STERLING FALLS AFTER RETAIL SALES MISS, WORSENING CONSUMER CONFIDENCE The British pound edged lower against both the U.S. dollar and euro on Friday after consumer morale fell to its lowest level in 16 months and an unexpected decline in retail sales. The Office for National Statistics said February retail sales volumes were down by 0.3% from January as stormy weather deterred some shoppers from venturing out. Meanwhile, a survey by GfK showed British consumer confidence fell to its lowest level since November 2020 in March because of inflation worries, high interest rates and the war in Ukraine. The pound gradually slipped against the dollar to trade 0.1% lower at $1.3174.