CAPITALDIGEST, MARKET REVIEW, 29TH AUGUST, 2022

EURO BOUNCES BACK ABOVE PARITY AS INVESTOR SENTIMENT IMPROVES The euro rebounded back above parity with the dollar on Thursday as the U.S. currency’s recent rally ran out of steam and investors waited to see whether Federal Reserve Chair Jerome Powell would sound a more hawkish tone at a meeting this week. A more bullish mood across markets also helped the euro, as well as currencies linked to broad investor sentiment such as the Australian dollar, which rallied nearly 1%. STERLING RISES 0.5% AS DOLLAR TAKES A BREATHER Sterling recouped some losses against the dollar on Thursday but was still languishing near a 2-1/2 year low ahead of upcoming speeches by Bank of England and Federal Reserve officials that could determine the near term outlook for the currency. The Kansas City Federal Reserve’s Jackson Hole Symposium kicks off on Thursday, with BoE Governor Andrew Bailey scheduled to join Fed Chair Jerome Powell and other central bankers at the three-day event. The pound hit its lowest level since March 2020 on Tuesday after purchasing managers’ index (PMI) data showed activity in the private sector slowed to a crawl in August. DOLLAR EDGES LOWER AS INVESTORS WAIT ON FED’S POWELL The dollar index and the euro both slipped on Thursday in choppy trading as investors waited on a speech by Federal Reserve Chairman Jerome Powell on Friday for further clues about the ongoing pace of the U.S. central bank’s rate hikes. Investors are tossing up between the likelihood of a 50 or 75 basis point rate increase in September as the Fed battles inflation, but also faces some softening U.S. economic data. “It seems to me that markets are maybe expecting a hawkish message from Powell,” said Shaun Osborne, chief FX strategist at Scotiabank in Toronto. However, “since the last FOMC the numbers out of the U.S. have not really been all that good. I think with gasoline prices in the U.S. coming down quite significantly there is the view that inflationary pressures may well have peaked,” Osborne said. Kansas City Fed President Esther George said it was too soon to predict by how much the U.S. central bank would raise interest rates next month, with key reports on inflation and the labor market still to come. DOLLAR HOLDS STEADY AS POWELL SPEECH APPROACHES The dollar held onto recent gains against the euro and sterling on Friday ahead of Federal Reserve Chair Jerome Powell’s widely-anticipated speech, which traders hope will offer clues on the U.S. central bank’s tightening plans. The euro was barely changed in Asian trade at $0.9971, having failed in several attempts this week to break back above parity against the dollar. It fell below that psychologically important level on Monday. Sterling was down 0.14% at $1.1821, not far from its more than two-year low of 1.1718 hit early in the week. STERLING SET FOR WEEKLY LOSS AFTER POWELL SPEECH LIFTS DOLLAR The British pound fell on Friday, on track for a weekly loss after a hawkish speech by U.S. Federal Reserve Chair Jerome Powell boosted the dollar. The dollar index strengthened after Powell said the U.S. economy will need tight monetary policy “for some time” before inflation is under control. Powell gave no indication of how high interest rates might rise. The pound-dollar pair fluctuated as the dollar reacted to Powell’s speech, hitting at one-week low of $1.1765. At 1627 GMT, the pound was down 0.6% on the day at $1.177, on track for a 0.5% weekly loss. The euro was up 0.7% versus the pound, with the pair at 84.865 pence per euro. Pound-investors also assessed the likely impact of an 80% rise in British household energy bills from October to an average of 3,549 pounds ($4,190) a year. The regulator Ofgem said the rise was a crisis that needed to be tackled by urgent and decisive government intervention. Inflation in Britain has hit a 40-year high, and the Bank of England has warned of a lengthy recession. Some bet the rising costs will lead to more government support for households. “Leveraged funds have increased substantially long GBP positions in recent weeks. One possibility for doing that may be the belief that the incoming UK government will act forcefully to protect UK households,” said MUFG head of research Derek Halpenny in a note to clients.