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CAPITALDIGEST, MARKET REVIEW. MARCH, 18, 2022.

MONDAY 11/4/2022 – STERLING FALLS AS DATA SHOWS BRITAIN’S ECONOMIC GROWTH STUTTERS Sterling fell on Monday (Apr 11) against the euro and the dollar after data showed the UK economy slowed more sharply than expected in February. Monthly gross domestic product rose by 0.1 per cent in February, down from 0.8 per cent growth in January. A Reuters poll of economists had forecast a 0.3 per cent increase. The pound edged 0.1 per cent to US$1.3025 at 0840 GMT, after briefly falling below US$1.30, remaining not far from its lowest level against the dollar since November 2020. “Sterling initially drifted lower in the wake of the data miss,” said Jeremy Stretch, head of G10 FX strategy at CIBC. “We remain mindful of rate expectations remaining excessive.” Money markets are currently pricing around 142.6 basis points by the Bank of England by year-end. Rising US yields have kept the dollar near its highest level since May 2020, as the Federal Reserve readies to cut its asset holdings and move interest rates sharply higher. Stephen Gallo, European head of FX Strategy at BMO Capital Markets, said “given the speed at which the Fed is normalising, our view is that cable has a better chance of holding above US$1.30 if the Bank of England is able to hike 50 bps after at least one of its next policy announcements (that is, in May or June)”.   TUESDAY 12/4/2022 – DOLLAR REBOUNDS AS BRAINARD ASSURES MARKETS FED WILL STAY THE COURSE The dollar rebounded on Tuesday after digesting slightly softer-than-expected U.S. inflation data, while the euro extended losses ahead of a policy-setting meeting at the European Central Bank. Federal Reserve Governor Lael Brainard said on Tuesday that there were some signs of “welcome” cooling in the latest inflation readout, but emphasized that the central bank is still proceeding with a series of interest rate hikes, as well as an effort to trim its balance sheet. “I’ll be looking to see whether we continue to see moderation in the months ahead,” Brainard told the Wall Street Journal in an interview, referring to inflation in the “core” goods category. The U.S. Consumer Price Index showed that prices rose 8.5% in March compared with a year ago, boosted by the soaring cost of gasoline but tempered by a moderation in prices of used cars and trucks. The core CPI fell short of estimates, landing at 6.5%. Brainard’s comments highlighted that the Fed “is not pivoting at this point,” providing an assurance for the greenback after a morning of choppy trading, said Bipan Rai, head of FX strategy at CIBC Capital Markets in Toronto. “The path of least resistance is still for tighter policy, and also for an aggressive unwind of the balance sheet, and as a result of that, I think the dollar is stabilizing a little bit,” he said.   WEDNESDAY 13/4/2022 – FOREX-DOLLAR SOFT AFTER AS U.S. YIELDS PAUSE The dollar was on the back foot on Thursday after tumbling overnight, particularly against sterling and the euro, as U.S. yields paused their march higher, offering some relief to the bruised and battered yen. Traders were also waiting for the European Central Bank meeting later in the day, to see whether they were in the same, more hawkish mood as their global peers. “At the beginning of the week I was saying everything followed from the ongoing grind higher in U.S. yields, equities were off, the dollar was soaring, and now because of what’s happening in Treasuries, everything has reversed,” said Ray Atrrill global head of FX strategy at National Bank of Australia. The benchmark 10-year Treasury yield US10YT=RR was 2.7120%. It rose steadily earlier this month – driven by expectations of more aggressive Federal Reserve tightening to combat inflation – and reached as high as 2.836% on Tuesday, ahead of U.S. inflation figures. However, while high, these were not quite as bad as some had feared, which observers said caused yields to pause.   THURSDAY 14/4/2022 – FOREX-EURO TURNS NEGATIVE AS ECB CONFIRMS PLANS TO END BONDS BUYS The euro fell on Thursday after the European Central Bank kept its policy stance broadly unchanged, sticking to plans to slowly unwind stimulus. The euro turned negative, falling 0.1% to $1.08820 as of 1210 GMT after the ECB confirmed its plans to cut bond purchases, commonly known as quantitative easing, this quarter, then end them at some point in the third quarter. Interest rates will, however, only go up “some time” after the end of bond buys and they will be gradual, the ECB added. Antje Praefcke, FX analyst at Commerzbank, said the market will not have a preference for the euro over the dollar until there is more clarity about whether the key rate will be raised in the fourth quarter. “I think the market will want to wait and see how the Ukraine conflict and the energy sanctions develop,” she said. In the meantime, the dollar index, which measures the greenback against six peers, edged up 0.06% at 99.854, slowly moving closer to its highest since May 2020 of 100.520 touched on Wednesday. The dollar had been finding support on a surge in Treasury yields this week.   FRIDAY 15/4/2022 – FOREX-EURO HOVERS NEAR TWO-YEAR LOW AGAINST DOLLAR AS ECB DISAPPOINTS MARKETS The euro plunged to its lowest level in two years against the US dollar on Thursday, with comments by European Central Bank President Christine Lagarde seen as a sign that the ECB was in no rush to raise rates interest rate, in contrast to an aggressive effort to tighten monetary policy. by the US Federal Reserve. The single European currency fell to $1.0758 EUR=EBSthe lowest level since April 2020. It was last down 0.53% at $1.0827. Lagarde said there was no specific timetable for when rates would start to rise, adding that it could take weeks or even months after the ECB’s stimulus package ends. “We’ll deal with interest rates when we get there,” she added. The ECB wrapped up its latest meeting on Thursday with cautious steps to unwind support and avoid a difficult timetable. He confirmed plans to reduce bond purchases, commonly known as quantitative easing, this quarter and then end them at some point in the third quarter. Against the British pound, the euro slipped to a one-month low and last fell 0.28% at 82.79 pence EURGBP=. Lagarde’s comments contrasted sharply with those of Fed Chairman Jerome Powell, said Joseph Trevisani, senior analyst at FXStreet.com. “They could have taken a book of what Jerome Powell did, and that’s being rhetorically aggressive.

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