Published: 28/03/2023 By ECAPSterling held its gains against major currencies after Bank of England Gov. Andrew Bailey, said inflation remained the main driver of monetary policy decisions in the wake of concerns about the banking turmoil. The ongoing worries about price pressures come less than a week after the BoE hiked rates by 0.25%, revised its economic growth forecast higher and flagged the strong labour market as a threat to inflation. In turn, about 50% of market participants now expect the BoE to hike a few more times this year before a pause. Ultimately, the less depressing economic growth outlook, at a time when the UK government’s fiscal plan is on a much steadier footing than it was six months ago, forced market participants to reassess their bearish calls on the pound.
The Euro held during yesterday's trading session as European Central Bank officials were keen to emphasise not only the continued need to tackle inflation but also the underlying strength of the region’s banks. Governing Council member Mário Centeno said that the European Central Bank must consider recent financial-market stress when making decisions on interest rates; however, their main focus right now is to control inflation and to bring it down to 2%. Looking elsewhere, French business confidence remained healthy in March despite the recent turmoil in the banking sector, according to data released this morning. This follows on from German business morale unexpectedly rising in March.
The US dollar drifted lower in early European trade this morning as returning confidence in the global banking sector weakened demand for this safe haven. Signs of stability in this crucial sector have reduced demand for the dollar, usually regarded as a safe haven in times of stress. The dollar index had climbed to a three-month high of 105.88 on March 8th, before sliding as low as 101.91 last week due to fluctuating risk sentiment following the different banking headlines across the globe. The turbulence in the banking sector has also changed the market’s expectation of the Federal Reserve’s likely interest-rate hiking path, with a pause in May now being widely expected.