The euro and sterling fell sharply against a stronger dollar on Friday amid lingering nervousness about banks. European bank shares tumbled, with banking giants Deutsche Bank AG and UBS Group AG tumbling on concerns that the worst problems for the sector since the 2008 financial crisis have yet to be contained.
On Friday, the U.S. dollar index closed up 0.40% at 103.03. EUR/USD closed down 0.48% at 1.0774 on Friday.
“For many, many years, whenever there was a perceived problem or an actual problem that looked like it might be ingrained, people would go and buy dollars, and I think that’s probably what’s happening now,” said Joseph Trevisani, senior analyst at FXStreet.com. “
The Fed’s revised Summary of Economic Projections (SEP), the so-called dot plot, showed the median policy rate at the end of 2023 at 5.1%, in line with its December forecast. The Fed’s median view for the federal funds rate at the end of 2024 is 4.3%, compared with 4.1% previously. The Fed’s median view for the federal funds rate at the end of 2025 was 3.1%, compared with 3.1% previously. The Fed’s median view on the long-term federal funds rate was 2.5%, compared with 2.5% previously.
The Fed’s projections imply an additional 25 basis points of rate hikes this year and 75 basis points of cuts in 2024. The Federal Reserve has lowered the economic growth rate of the United States this year and next: the median GDP growth rate from 2023 to the end of 2025 is expected to be 0.4%, 1.2%, and 1.9% respectively (the December forecast is 0.5%, 1.6%, and 1.8% respectively); from 2023 to the end of 2025 The median unemployment rate is expected to be 4.5%, 4.6%, 4.6% respectively (December is expected to be 4.6%, 4.6%, 4.5% respectively); the median core PCE inflation expectations from 2023 to the end of 2025 are 3.6%, 2.6%, 2.1% % (December is expected to be 3.5%, 2.5%, 2.1%).
Risk aversion also sent sterling down more than 0.5 percent against the dollar at one point to 1.2189, despite data showing the UK economy will grow in the first quarter and confidence is growing. Sterling hit a seven-week high of 1.2341 in choppy trade on Thursday after the Bank of England raised interest rates by 25 basis points to 4.25%, but said a surprise pick-up in inflation could fade quickly, prompting calls for an end to hikes. guess.
Bank shares have been hit this month after the sudden collapse of two regional U.S. lenders and the emergency sale of troubled Swiss lender Credit Suisse to rival UBS.
Christopher Wong, currency strategist at OCBC, said the foreign exchange market appeared to signal a bout of risk aversion, with safe-haven instruments, gold and the yen outperforming, and most other currencies weakening.
However, USD/JPY closed down just 0.05% on Friday at 130.71.
The Federal Reserve raised interest rates by 25 basis points last Wednesday, as expected, but also took a cautious stance on the outlook amid turmoil in the banking sector, even as Fed Chairman Jerome Powell left the door open to further rate hikes if necessary.
U.S. Treasury Secretary Janet Yellen reiterated on Thursday that she was ready to take further steps to ensure the safety of Americans’ bank deposits in an effort to ease investor nerves.
Trevisani said,The market will pay close attention to the February PCE price index, which will be released in the United States on March 31, to understand how the data will affect the Fed’s next interest rate decision. “If you get a number that’s the same as expected or weaker, I think that gives the Fed a reason to pull back, which they’re doing anyway,” he said.
Key data and events
Institutional view
① AMP Capital: The RBA can ignore the actions of central banks and stop raising interest rates in April;
Shane Oliver, chief economist at AMP Capital, said that since the banking turmoil, major central banks appear determined to show that they have the means to deal with financial problems and therefore can keep raising rates to fight inflation. While these moves could complicate the situation facing the RBA, it doesn’t mean the RBA has to keep raising rates now. The European Central Bank and the Federal Reserve raised interest rates but reduced their hawkish guidance on rates amid banking turmoil. And because of the previous rebound in UK inflation, the Bank of England may be forced to cross this line. The SNB is still catching up with the ECB, with its policy rate currently at just 1.5%.The agency’s basic expectation is still that the RBA will pause interest rate hikes, and the probability of a pause in raising interest rates is very high
② HSBC: The RBA has finished raising interest rates;
Paul Bloxham, head of Australian economics at HSBC, said: “We think the RBA is done raising rates, at least for now. We see the RBA prioritizing a soft landing for the economy, even if it means inflation will be temporarily above target. However, Given that inflation is expected to remain elevated for some time, we do not expect a rate cut anytime soon”
③ Bank of America: British interest rates may remain high to curb high inflation;
Bank of America analysts pointed out in a report that the Bank of England may keep interest rates high to curb high inflation as the cost of goods and services in the UK is expected to remain high. Analysts said: “We still think that the UK faces persistent inflation problems. Therefore, we think that the Bank of England will cut interest rates slowly after reaching the terminal rate”
④CICC: The Federal Reserve may not cut interest rates easily;
The CICC research report pointed out that combing the conditions for the Fed to cut interest rates in history, it is found that either the risk of economic recession and deflation has increased significantly; or there is a major “black swan” in the financial market, which may evolve into a financial systemic risk. Taking history as a guide, we believe that if there is no greater financial risk event than now, the Fed may not cut interest rates easily. This time the Fed may adopt a combination of “high interest rates + temporary expansion” to deal with the dual challenges of inflation and financial risks. So why is the market looking forward to a rate cut so much? One explanation is the hope that the “Fed put option” (Fed put) will reappear, and the market will return to the “beautiful era” when stocks and bonds doubled and asset prices rose in an all-round way
⑤ Commerzbank: The impact of the Bank of England’s interest rate decision on the pound is neutral;
The Bank of England raised interest rates by 25 basis points on Thursday as scheduled. Ulrich Leuchtmann, head of foreign exchange and commodities research at Commerzbank, believes the Bank of England is doing a good job. Leuchtmann said he wasn’t referring to the bank’s monetary policy but its communications policy. Although the Bank of England raised interest rates by only 25 basis points, it did not give the impression of weakening determination to fight inflation. “That’s why yesterday’s BoE rate decision was neutral for sterling, contrary to my expectations,” Leuchtmann said. “Unlike the Fed, BoE officials did not give any hints of being less hawkish.”
⑥ Barclays: The market expects the European Central Bank to continue to raise interest rates, but the peak is still lower than the level before the banking crisis;
Barclays interest rate strategists Max Kitson and Armando Marozzi wrote in a note that markets have priced in higher ECB terminal rates over the past week, but remain well below levels seen before the recent banking crisis. Against this backdrop, and given worrisome core inflation dynamics in Europe and the tone of ECB commentary, strategists see room for further declines in short-dated Treasuries, provided financial stability concerns remain contained.Markets continue to price in the ECB’s terminal rate below 3.5%, but strategists say this pricing may be underestimating the ECB’s Governing Council’s willingness to push rates further into a restrictive range
⑦ Capital Economics: The latest Eurozone PMI data indicates that the European Central Bank will further raise interest rates in the future;
Franziska Palmas, senior European economist at Capital Economics, said the March PMI data for the euro zone painted a picture of economic resilience, providing further room for the ECB to raise interest rates in the coming months. Palmas said the data meant that growth in the euro zone economy in the first quarter was almost certain, and indicated that employment conditions were very strong and inflationary pressures persisted. “It is clear that economic activity in the euro area will not be directly affected by the U.S. and Swiss banking crises, as banks in the region have not been harmed. But economic activity could still be hit by a crisis-related drop in confidence,” Palmas said.