Dollar muted on Wednesday as traders await Fed rate decision: Photo by Domenico Loia on Unsplash
The dollar muted near five-week lows on Wednesday ahead of the conclusion of the U.S. Federal Reserve’s policy meeting
Dollar muted on Wednesday as traders await Fed rate decision: Photo by Domenico Loia on Unsplash
Reuters: The dollar muted near five-week lows on Wednesday ahead of the conclusion of the U.S. Federal Reserve’s policy meeting, with investors awaiting clarity on the path the central bank is likely to take in the wake of global banking turmoil.
Investor attention is zeroed in on whether the Fed will stick to its hawkish path to fight sticky inflation or pause interest rate hikes given recent trouble among banks which has included bankruptcy and last-minute rescues. The U.S. dollar index , which measures the currency against six peers, was at 103.19, just above the five-week low of 102.99 touched overnight. The euro was at $1.0770, hovering around a five-week high of $1.0789 scaled overnight. Markets are now pricing in about a 15% chance of the Fed not increasing rates, with a roughly 85% chance of a 25 basis point hike, showed the CME FedWatch tool. Just a month earlier, the market was pricing in a 24% chance of a 50 basis point hike.
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Investor sentiment remained fragile with worries over the outlook for the banking sector starting to ease after sharp volatility in the market in the past few weeks following high-profile U.S. banking failures earlier in the month and the rescue of lender Credit Suisse Group AG at the weekend. “Markets are seemingly becoming more comfortable with the idea that authorities have probably done enough to prevent a systemic banking crisis,” said Rodrigo Catril, a senior currency strategist at National Australia Bank in Sydney. “It might be early days, but the price action over the past 48 hours is certainly signalling a change in mood by investors.” The Fed meeting concludes on Wednesday with the 2 p.m. EDT (18:00 GMT) release of a policy statement followed half an hour later by a news conference by Chair Jerome Powell. Catril said the Fed faces a difficult choice given a strong labour market alongside February inflation figures that were higher than many market watchers expected. Such circumstances would usually be ripe for a return to a 50 basis point hike were it not for worries over financial stability, he said.
Christopher Wong, currency strategist at OCBC, said the focus will be on how the Fed communicates its forward guidance, in particular “the higher for longer” rhetoric. “Ideally, we would like the Fed to go with a 25 basis point hike this meeting, tone down hawkish guidance and emphasize that policy decisions at subsequent meetings will continue to be data-dependent,” Wong said. “This wishlist should see dollar trade on the softer profile and risk proxies trade steadily.” Meanwhile, the yen strengthened 0.04% to 132.47 per dollar, whereas sterling was last trading at $1.2233, up 0.16% on the day. The Australian dollar rose 0.36% to $0.6694, while the New Zealand dollar gained 0.11% to $0.6199. In cryptocurrencies, bitcoin last rose 0.44% to $28,276.58, but was below a nine-month peak it touched on Monday.
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Reuters: Sterling fell on Tuesday as broader market fears about banks subsided and the focus shifted to the outlook for interest rates, with the Federal Reserve and Bank of England (BoE) both due to meet this week. After a tumultuous few weeks in financial markets, shares in European banks rallied on Tuesday for a second consecutive day, with fears of contagion assuaged following UBS Group’s state-backed takeover of Credit Suisse on Sunday. By 12:05 GMT, the pound was 0.2% down against the dollar at $1.22560 , and 0.7% lower against the euro at 87.940 pence. Relative calm extended to forex markets where traders turned their attention back to interest rate expectations, which have shifted dramatically in recent days.
The Fed will announce its next rate decision on Wednesday, while the BoE will convene on Thursday, as will the Swiss National Bank and Norwegian central bank. As of Tuesday morning, markets were pricing in a 44% chance of no change from the BoE, and a 56% chance of a 25 basis-point increase. UK inflation data on Wednesday will also be closely watched and is expected to show some easing. “The data has been somewhat more mixed of late, with growth holding up better than expected and the labour market continuing to run hot,” said Stuart Cole, head macro economist at Equiti Capital, though he also pointed out that wage growth is showing signs of slowing, and services inflation may have peaked. “And of course there is the similar need to address the fragile financial market conditions. Overall I think we get a hike from the BoE, and this should continue to provide support for sterling.”
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Vasileios Gkionakis, European head of FX strategy at Citi, expects the BoE to leave the base rate unchanged given recent deceleration in inflation and wage growth, writing in a note on Tuesday that recent market tensions “should also contribute to this decision”. “We think it is a very close call between rates having peaked and the BoE delivering one more rate hike later; however, our bias is that the central bank is done tightening,” Gkionakis said.
Reuters: The South African rand weakened against the dollar on Monday ahead of planned protests by the Marxist Economic Freedom Fighters (EFF) party. At 07:43 GMT the rand traded at 18.4350 against the dollar, 0.16% weaker than its previous close. South African security forces on Monday said 87 people had been arrested over the past 12 hours over public violence. The Marxist Economic Freedom Fighters (EFF) party has called for a national shutdown to protest crippling power cuts and demand the resignation of President Cyril Ramaphosa. “This constitutes a risk event for the country and could harm sentiment on South African markets if the outcome is bad,” ETM Analytics said in a note.
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A Reuters poll found on Monday that South Africa’s Reserve Bank will raise interest rates for the last time in this cycle by 25 basis points on March 30, in anticipation of slower inflation and a weak economy due to power disruptions. Statistics South Africa will publish on Wednesday February inflation figures, which will give more clues about the health of Africa’s most industrialised economy. The government’s benchmark 2030 bond was stronger in early deals, with the yield down 8 basis points to 9.955%.
Reuters: Asian shares staged a cautious bounce on Wednesday with hopes a global banking crisis would be averted vying with uncertainty over the outlook for U.S. interest rates as the Federal Reserve holds a high-stakes meeting on policy. Efforts by U.S. Treasury Secretary Janet Yellen to calm nerves seemed to be working with bank shares rallying overnight. Government officials were also pondering increasing the limit on deposit insurance, though there was no agreement on this as yet. Strains were still evident among regional U.S. banks with shares of First Republic Bank sliding on suggestions the government might be involved in a rescue deal, perhaps disadvantaging shareholders. The unease left both S&P 500 futures and Nasdaq futures barely changed. EUROSTOXX 50 futures edged up 0.2%, while FTSE futures rose 0.1%. MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.9%, with Chinese blue chips up 0.3%. Japan’s Nikkei firmed 1.6% led by a rebound in beaten-down bank stocks.
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The still brittle mood was evident in the latest BofA survey of global fund managers which found pessimism near its worst in the past 20 years amid fears of financial risk and a flight from bank stocks. All of which puts the Fed in a tough position as it decides whether to raise interest rates later today. Goldman Sachs, for one, argues the banking stress will cause a tightening in lending that is essentially the same as a rate hike so a pause would be warranted. Analysts at JPMorgan, on the other hand, stand with the majority and flag a rise of 25 basis points in part because postponing a move until May would threaten the Fed’s inflation-fighting credibility. They note the Fed could still soften its forward guidance by dropping its reference to “ongoing increases”, much as the European Central Bank did last week.
An added complication is whether the Fed temporarily stops selling its holdings of Treasury debt, known as Quantitative Tightening, and what Fed members do with their dot plot forecasts for future rate hikes. The latter will be a key focus as the market is all over the place on the policy outlook. Having even priced in the risk of a rate cut last week, futures now imply an 86% chance of a quarter-point rise to 4.75-5.0%. Then again, a couple of weeks ago the market had been wagering on a half-point hike. Investors have also swung back to expecting a further increase in May, but also imply some chance of a cut as early as July and rates at 4.25-4.50% by year-end. How Fed Chair Jerome Powell navigates all this in his 18:30 GMT news conference could well determine the course of markets for the rest of the week. Bond investors will be hoping he can instil some calm given the wild volatility of recent days. Two-year Treasury yields were hesitating at 4.14%, having made a remarkable round-trip from 5.085% to 3.635% in just nine sessions.
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European bonds have gone along for the ride. German two-year yields overnight recording the biggest daily jump since 2008 as markets went back to pricing in more ECB hikes. That jump helped lift the euro to a five-week high of $1.0789 overnight, and it was last holding firm at $1.0770. The dollar went the other way on the yen, where yields are still tightly controlled by the Bank of Japan, and rose to 132.50. Safe-haven demand for yen had seen the dollar as low as 130.55 early in the week. In commodities, the mild improvement in risk sentiment saw gold ease back to $1,943 an ounce and away from Monday’s top around $2,009. Oil prices eased a touch in early trade, having rallied 2% overnight. Brent dipped 22 cents to $75.12 a barrel, while U.S. crude fell 27 cents to $69.40.
Published by the Mercury Team on 22 March 2023
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