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CAPITALDIGEST, MARKET REVIEW. 7TH, FEBRUARY, 2022

MONDAY 31/1/2022 – POUND CEDES GAIN VS EURO, WEIGHS CHANCES OF HAWKISH BOE Sterling firmed against the dollar on Monday and briefly hit 23-month highs against the euro at the start of a week where the Bank of England is expected to raise interest rates for the second time in as many months. The currency benefited from the greenback’s broad retreat but it gave up earlier strong gains against the euro, which jumped 0.6% on the day against the dollar. The pound mostly shrugged off news that an inquiry by civil servant Sue Gray into lockdown parties at Prime Minister Boris Johnson’s office and residence had condemned some of the behaviour in government as being “difficult to justify.” Johnson, facing the gravest threat to his premiership, apologised to parliament here. By 1600 GMT, the pound was up 0.2% versus the dollar at $1.3419 but eased 0.3% to the euro at 83.520 after hitting 83.05 pence, its highest level since mid-February 2020 . The British currency is set to end January with a loss against the dollar, which has benefited from the rapid ramping up of Fed rate hike bets. Against the euro it is up 0.7% this month, partly erasing some earlier gains as markets also price euro zone interest rate hikes for end-2022.   TUESDAY 1/2/2022 – STERLING ON THE RISE, WITH FURTHER BOE TIGHTENING EYED Sterling rose for a third straight session to a week-high against the dollar on Tuesday as investors speculated the Bank of England could go beyond announcing another interest rate hike this week and set the path for further monetary tightening. Investors have now fully priced a 25 basis point rise in rates to 0.50% on Feb. 3 and economists polled by Reuters also expect that outcome from the BoE meeting. Amid fears the BoE might be behind the curve when it comes to tackling inflation, there is uncertainty over the pace at which it will raise rates and the level at which they will peak. At the moment, money markets are pricing rates at about 1.25% by year-end. With the 0.5% level expected to be hit on Thursday, traders are also wondering how soon and how fast the bank will start reducing its balance sheet and stop reinvesting maturing gilts. “While we do not expect the BoE to start QT (Quantitative Tightening) this week, it may signal when it could begin – probably May, in our view,” Berenberg economists told clients in a note.   WEDNESDAY 2/2/2022 – STERLING RISES FURTHER AHEAD OF EXPECTED BOE RATE HIKE The British pound climbed on Wednesday for a fourth session in a row, reaching a 1-1/2-week high against the dollar, as investors firmly held to their expectations that the Bank of England will raise interest rates on Thursday. Investors have now fully priced a 25-basis-point rise in the BoE’s main interest rate to 0.50% on Feb. 3 and economists polled by Reuters also expect that outcome from the meeting. In late afternoon trading in London, the pound was up 0.36% at $1.3575 , its highest level since Jan. 21. At 83.27 pence for a euro, the British currency was also creeping closer to 83.07 pence, its best exchange rate against the common currency since February 2020. Kit Juckes, head of FX strategy at Societe Generale in London, noted that the pound “found it quite hard getting through” the 83 pence bar, a threshold crossed only a handful of times since 2016. He argued that the positive sentiment across equity markets was driving risk-on currencies against the dollar and that the policy meetings of both the European Central Bank and the BoE on Thursday were not currently expected to turn out as game changers for currency markets. Both meetings will, however, be closely watched.   THURSDAY 3/2/2022 – EURO RISES TO THREE-WEEK HIGH VS DOLLAR AFTER ECB’S LAGARDE TURNS HAWKISH The euro surged to a three-week high against the U.S. dollar on Thursday after comments from European Central Bank President Christine Lagarde fuelled expectations of faster policy tightening, as she focused on the prospect of euro zone inflation overshooting. She also did not repeat previous comments that interest rates in the region were not likely to rise this year. The single European currency rose as high as $1.1452 , the highest since Jan. 14, and was last up 1.2% at $1.1441. The euro was on track for its largest daily percentage gain since early December 2020. Lagarde acknowledged on Thursday that euro zone inflation was running hotter than expected, with risks tilted to the upside. She also said the ECB, which left policy rates unchanged at Thursday’s meeting, would not rush into new moves. When asked if the ECB was “very unlikely” to raise rates this year, Lagarde said it would assess conditions very carefully and be “data-dependent.” Euro zone money markets are currently pricing an 80% chance of a 10 basis-point hike in June and an almost 100% chance of 40 bps of hikes by year-end, from a 90% chance of 30 bps hikes before Lagarde’s press conference.   FRIDAY 4/2/2022 – DOLLAR RISES FROM TWO-WEEK LOW AFTER U.S. JOBS SURPRISE The U.S. dollar advanced from two-week lows on Friday after data showed the world’s largest economy created far more jobs than expected, raising the chances of a larger Federal Reserve interest rate increase at the March policy meeting. The dollar index, a gauge of its value against six major currencies, rose 0.1% to 95.446, after falling to a two-week low of 95.136 earlier amid a resurgent euro. But the dollar was still down 1.8% on the week, on pace for its largest weekly percentage decline since November 2020. Data showed U.S. nonfarm payrolls grew 467,000 jobs last month. Data for December was revised higher to show 510,000 jobs created instead of the previously reported 199,000. Economists polled by Reuters had forecast 150,000 jobs added in January. Estimates ranged from a decrease of 400,000 to a gain of 385,000 jobs. Market participants were prepared for a weaker-than-forecast reading given the decline in the ADP U.S. private payrolls report released earlier this week. That report showed a decline due to the impact of the Omicron coronavirus variant.

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