Market Report : 17.03.23

Published: 17/03/2023 By ECAP

Sterling struggled for support during yesterday’s session as investors and economists began to adjust their bets on further tightening from the Bank of England. After the recent disruption across the US and European banking sector, economists have begun to analyse the potential impact of continued interest rate hikes and are re-evaluating the likelihood of a pause at the BoE’s next meeting. Resolution Foundation, a UK think tank, released a report which suggested that the UK was on track for a decade of wage stagnation, with the economy likely to remain depressed. Furthermore, continued industrial action across the UK may have had a further mollifying effect on the pounds appeal, as teachers and rail workers continued to stage walkouts across the country.

The Euro traded without much direction during yesterday’s trade, as the ECB delivered a 50-basis point rate hike. While this was priced in by markets, investors reacted to the hike and accompanying speech by ECB President Christine Lagarde with little movement. While the Euro did recover ground against some currencies, it seemed unable to consolidate these gains, becoming trapped in relatively narrow bounds. Ultimately, this may be because the ECB appeared to outline a more dovish path forward, which was largely expected by markets and analysts alike. Moreover, during the rhetoric that followed the decision, Lagarde reiterated that the ECB would be moving towards a more data dependent path in terms of future rate hikes.

The US dollar slipped this morning after authorities and banks moved to ease stress on the financial system, taking the heat off most major currencies that tumbled this week in the wake of the banking turmoil. The support for banks, coupled with government reassurances that the banking sector was stable, helped ease concerns over an imminent collapse in the banking system, following the failure of several US banks over the past week. The dollar index and dollar index futures retreated about 0.3% each amid bets that the Fed will taper its hawkish stance to prevent further pressure on the economy from rising interest rates. Markets are now pricing in a nearly 90% chance that the Fed will hike rates by a smaller 25-basis points next week.