Market Report : 23.03.23

Published: 23/03/2023 By ECAP

Sterling surged this morning ahead of the Bank of England’s policy meeting scheduled for later in the session. BOE Governor Andrew Bailey hinted earlier this month that the policymakers could be looking to pause its rate-hiking cycle, but the latest UK inflation data makes that look very unlikely. British consumer price inflation rose to 10.4% in February from January's 10.1%, way above expectations and almost back to where it was in December. Market participants will pay close attention to the vote split, in the case of the policy statement showing the decision was taken by a small margin of votes, markets could see that as a sign that the BOE could pause its tightening cycle at the next meeting and vice versa.
The Euro has regained a lot of ground over the past couple of days as it would appear that recent market fears have calmed. Whether it’s the realisation of the different treatment of AT1 bonds outside of Switzerland, or reassurances from the ECB that echo the sentiment that European banks are able to weather turmoil, EU assets have responded positively. Now that markets have had time to assess the rout in the banking sector and whether the EU is more or less vulnerable to a systemic crisis than the rest of the developed world, it appears that the early signs of a return to stability may be in the works. Ultimately, with markets appearing convinced that the ECB has a handle on things, implied rate probabilities now fully price in a 25-basis point hike anywhere from now until September.

The US dollar slumped to a seven-week low in early European trade this morning following the latest Federal Reserve interest rate increase. The Dollar Index traded at 101.76, just above levels last seen in early February – marking its longest losing streak in 2 and half years as it falls for the sixth day in a row. The Fed raised its benchmark funds rate by 25-basis points, as widely expected, but took a more cautious stance about further increases, hinting it could pause interest rate rises following turmoil in the banking sector. Moreover, the US central bank also cut its median forecast for real GDP growth this year to 0.4% from 0.5%, suggesting the banking crisis was already having an impact on economic activity, albeit limited at the moment.