Market Report : 29.03.23

Published: 29/03/2023 By ECAP

Sterling seems to be consolidating its recent gains and has been one of the better performers during recent banking sector concerns in the US and Europe. The pound stands out as one of the better performing currencies in G10 and EM combined since the outbreak of the banking turmoil almost three weeks ago. The performance can be tied to confidence in the UK banking sector, the brightening in UK economic prospects and a partial covering of short GBP positions by speculative investors. Sterling was higher at the start of the week amidst indications the UK economic rebound can extend over the coming weeks after the CBI reported retail sales in March consolidated near the highest level since October.

The Euro is struggling to find a clear direction despite renewed optimism in the European banking sector. Moreover, the common currency seems to be facing further headwinds despite better-than-expected German data. Business confidence in the Eurozone’s largest economy unexpectedly improved this month – even with the recent chaos in financial markets. However, the downside seems to have come following a flare-up in tensions in the Russia-Ukraine war, with fears of further escalation troubling EUR investors. Looking forward, economists forecast another rise in consumer confidence in the Eurozone’s largest economy, which could provide further support to the bloc’s common currency. In the meantime, any further developments in the European and US banking sectors, and their subsequent impact on risk appetite, could continue to drive price dynamics.

The US dollar edged higher in overnight trade, attempting to arrest two days of losses, as easing fears of a banking crisis spurred a sharp bounce in Treasury yields. The dollar index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 102.328, after drops of about 0.35% in each of the past two sessions. The overnight rise in bond yields, with the 10-year benchmark US yield climbing to a fresh one-week peak, has rekindled some bets that the Federal Reserve still has room to keep raising interest rates. That said, Federal Reserve Bank of Minneapolis President Neel Kashkari – one of the FOMC’s biggest hawks – warned earlier this week of the economic impact of a credit crunch, saying the recent bank turmoil has increased the risk of a US recession. Ultimately, many analysts believe that, since the Fed is not offering a hawkish narrative to lean on, market pricing of future rate moves remains strictly tied to news on financial stability – for now.