RedFX Update: USD suffers on SVB news, ECB interest rates announced this week
The collapse of 2 large US banks has spread fears of global contagion and questions how the US Central Bank can continue to raise rates in such a seemingly unstable environment. GBP remains resilient, and the ECB is the stand-out Central bank remaining steadfast in the determination to keep raising.
GBP: Today’s wage data showed that wage price inflation MIGHT have peaked in the UK which will be ‘welcome news’ for the UK central bank which meets next week (ILO Unemployment rate held steady at 3.7% in January – lower than expected). Previously, economists fully expected a 0.25% rate increase, but with data like this, a rise may not seem necessary.
If the US Federal Reserve DOES slow rates, economists at ING sees GBP/USD rising to 1.2450 even if the UK Central Bank stops raising rates.
Wednesday 15th sees the UK Chancellor announce his budget report – although a domestic issue, it cannot be ignored by FX markets.
GBP/EUR at 1.1350 GBP/USD at 1.2175
EUR: After continued aggressive hikes and rhetoric AND (as yet) no contagion in the EU banking sector, EURO might continue to be well-supported. GBP/EUR at 1.1350 is in the middle of the recent range but seems a fair distance from 1.1700 levels seen at the end of 2022.
Thursday 16th sees the ECB interest rate decision where a hike of 0.5% is expected to take rates to 3.5% and the all-important Press Conference
USD: The markets pulled back on USD optimism following the closure / collapse of Silicon Valley Bank and Signature in the past few days. Although contagion seems limited, for the Fed to keep raising rates against this AND the mixed labour-market report backdrop, just became more difficult.
This afternoon’s US Inflation data (CPI) came in at 6% in February after being at 6.4% in January. This was in-line with expectations and will not encourage speculators to bet on a 50bp interest rate-rise:
CME Group FedWatch Tool shows that markets are pricing in a 85% probability of a 25 basis points Fed rate hike at the upcoming meeting, up from 56% earlier in the day.
Closely watched Fed Funds have recently predicted that the US holds interest rates steady (i.e. STOPS raising rates) as early as June this year – a BIG change from recent thinking – this means the USD has a long way to pull back and correct itself.
A falling USD has pushed GBP/USD up to 1.2150 (having been at 1.1850 last week) and EUR/USD up to 1.0725 from 1.0600 levels last week.
EUR/USD 1.0725
AUD: Under pressure as markets expect the RBA to start slowing the pace of interest rate increases. Employment data this week is very important.