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CAPITALDIGEST, MARKET REVIEW. 9TH MAY 2022.

MONDAY 2/5/2022 – DOLLAR APPROACHES 20-YEAR HIGHS, FED MEETING IN FOCUS The dollar held just below a 20-year high against a basket of currencies on Monday before an expected Federal Reserve rate hike this week, with traders focused on the potential for the U.S. central bank to adopt an even more hawkish tone than expected. The Fed has taken an increasingly aggressive approach to monetary policy as it tackles inflation that is soaring at its fastest pace in 40 years. It is expected to hike rates by 50 basis points and announce plans to reduce its $9 trillion balance sheet when it concludes its two-day meeting on Wednesday. Though the chances are seen as low, some investors are watching for the possibility of a 75 basis point hike, or a faster pace of balance sheet reduction than currently expected. “A lot of traders are anticipating that the Fed’s not going to back down from this hawkish stance and you could still see some hawkish surprises, and that’s why the dollar is likely to hold on to its gains heading into the meeting,” said Edward Moya, a senior analyst with OANDA in New York. Comments by Fed Chairman Jerome Powell at the conclusion of the meeting will also be scrutinized for any new indications on whether the Fed will continue to hike rates to battle rising price pressures even if the economy weakens.   TUESDAY 3/5/2022 – STERLING BOUNCES HIGHER AS DOLLAR SURGE EASES The British pound rose on Tuesday, moving away from 21-month lows against the dollar as traders took profits on the recent surge in the U.S. currency ahead of both Federal Reserve and Bank of England monetary policy meetings this week. The Bank of England (BoE) meeting, which is expected to result in a 0.25-percentage-point rise in interest rates on Thursday, is the big event of the week for sterling. In recent weeks the pound has fallen sharply as investors have piled into dollars in expectation that the Federal Reserve will raise rates faster than other central banks and that the U.S. economy will hold up better than others in the face of soaring inflation and slowing global growth. The U.S. central bank will meet on Tuesday and Wednesday and is expected to raise interest rates by 50 basis points – the first of a series of aggressive hikes expected by money markets. Rises totalling 270 basis points by February are priced in. On Tuesday, sterling climbed 0.5% to as high as $1.2566 , compared with a 21-month low of $1.2412 hit last week.   WEDNESDAY 4/5/2022 – DOLLAR FALLS TO ONE-WEEK LOW AS POWELL PUSHES BACK AGAINST 75 BP HIKE The dollar fell to a one-week low against a basket of currencies on Wednesday after Federal Reserve Chairman Jerome Powell played down the prospect of a 75 basis point rate hike, even as he said the U.S. central bank will act aggressively to stamp out inflation. Powell said in a press conference following the Fed’s policy statement that the U.S. central bank is not actively considering a 75 basis point increase, but that additional 50 basis point jumps should be on the table for the next couple of meetings. read more It came after the Fed raised its benchmark overnight interest rate by 50 basis points, the biggest increase in 22 years, in a widely expected decision. read more “The market was pricing in essentially a 50/50 chance that you see a 75 basis point hike by July, between June and July, and so I think the most important takeaway here that I think the market was really fixated on, was whether or not a 75 basis point hike is on the table, and he (Powell) basically pushed back on that,” said Mazen Issa, senior fx strategist at TD Securities in New York.   THURSDAY 5/5/2022 – DOLLAR INDEX HITS 20-YEAR HIGH, STERLING TUMBLES ON DOVISH BOE The dollar hit a 20-year high against a basket of currencies on Thursday as a sharp stocks selloff boosted demand for the safe-haven currency and as the Federal Reserve was seen as tightening monetary policy more than peers. Stocks tumbled on Thursday as investors fretted the Fed might need to take more drastic action to bring inflation under control. read more The greenback dropped on Wednesday, and stocks gained, after Fed Chair Jerome Powell told reporters that policymakers were not actively considering 75-basis-point moves in the future. It came after the U.S. central bank hiked rates by 50 basis points, as was widely expected. read more “Markets cheered the Fed’s decision which came at the dollar’s expense as it helped to quell fears about aggressive rate hikes pushing the economy into recession,” Joe Manimbo, senior market analyst at Western Union Business Solutions said in a report. “The dollar bounced back, though, as rates still appeared on a path to more than double (1.9%) by July and potentially triple (2.7%) by year-end, a solidly hawkish outlook that sets the Fed apart from its major rivals,” he added. The dollar index reached 103.94, the highest since Dec. 2002, before falling back to 103.73, up 1.16% on the day.   FRIDAY 6/5/2022 – DOLLAR INDEX SLIPS FROM 20-YEAR HIGH, FED RATE PATH IN FOCUS The dollar slipped against a basket of currencies on Friday after two volatile days as investors focused on how aggressive the Federal Reserve might be in hiking rates as it tackles rising inflation. The dollar index hit a 20-year high overnight on safe-haven demand, following Thursday’s sharp stock sell-off driven by concerns about the Fed’s aggressive tightening and as European currencies weakened on worries about growth in the region. It retraced some of these gains, however, as investors evaluated how much of the Fed’s hawkishness was already priced into the greenback, and as some analysts suggested that inflation may be nearing a peak. Data on Friday showed U.S. jobs increased more than expected in April. Average hourly earnings rose 0.3% after advancing 0.5% in March. That lowered the year-on-year increase in wages to 5.5% from 5.6% in March. “The good news is that wages were not going up as fast as they were and that should begin to calm down that speculation. The market will have to recognize that maybe inflation is peaking,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

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