Uncertainty in the banking sector following the collapse of SVB has been the main talking point in markets in recent weeks. The focus now is on if it will push central banks to halt interest rate hikes. As of yet, the ECB, BoE, and Federal Reserve are continuing to raise rates to combat sticky inflation.
- Could more uncertainty lead to a pause in the current hikes? Possibly, but given inflation (especially in the UK) remains elevated, we aren’t so sure.
- The surprise inflation data from the UK in the most recent reading probably means the country will have to continue to increase interest rates. However, the BoE said in its statement that it expects inflation to fade this year, which suggests they expect to slow down hikes further after a 25bps increase.
- While in the US, the rate of inflation is falling, it is still elevated. Chair Jerome Powell said that if the totality of the data were to indicate that faster tightening is warranted, they “would be prepared to increase the pace of rate hikes,” which would boost the dollar and impact equity markets.
US Dollar
Following a solid performance in February, the US dollar retreated again against most other major currencies in March, with the DXY currently around 102.64. There has been a lot of talk surrounding China and some other countries settling oil trades in currencies other than the dollar, fuelling talk that its status as the world reserve currency is coming to an end. However, be aware that there is more to it.
Those countries will probably convert the currency they receive into dollars due to its safe status. Even so, demand for the dollar could still be impacted. In addition, if the current risk-on sentiment continues, then the US dollar will lose more ground against its counterparts. Given the current macroeconomic environment and technical setup of the USD against other currencies, we see it continuing to weaken in April.
Key Levels
- EURUSD: Higher – 1.1140, Lower – 1.0515
- GBPUSD: Higher -1.2602, Lower – 1.1807
- USDJPY: Higher – 137.30, Lower – 127.00
Euro
Inflation in the Euro area is creeping lower. Still, the ECB raised rates at its latest meeting, with ECB President Christine Lagarde stating that interest-rate increases may need to continue beyond March. This has helped push the euro higher in March, and given the current environment, the climb may continue into April. Furthermore, a Nordea Markets analyst recently stated they expect the ECB to deliver several further rate hikes in upcoming meetings. So while uncertainty is still a factor to watch out for, the current direction for April suggests higher, although, as we have seen in recent weeks, sentiment can instantly turn.
Key Levels
- EURUSD: Higher – 1.1140, Lower – 1.0515
- EURGBP: Higher – 0.8960, Lower – 0.8680
British Pound
While the EU and US have seen inflation continue to edge lower, the UK reading is in the double digits after rising unexpectedly. However, the BoE only raised by 25bps in its latest meeting and said they believe inflation will begin to fall. If sticky inflation persists, expect hikes to continue and the GBP to rise. Recent news surrounding a deal with the EU on Northern Ireland trade and reports that the UK has been accepted into the CPTPP should help give the pound a lift.
Key Levels
- EURGBP: Higher – 0.8960, Lower – 0.8680
- GBPUSD: Higher – 1.2602, Lower – 1.1807
Japanese Yen
The Bank of Japan’s Governor will change in April, with Kazuo Ueda set to take the helm. The BoJ has kept rates at 0 for an extremely prolonged period. Still, with inflation reaching a four-decade high of 4.2%, many believe the incoming governor will raise rates, marking a significant change away from the previous policy. In the last week or so, the Japanese yen has weakened as the market environment shifted to risk on. However, if the BoJ finally increases interest rates, a yen jump is expected. We will be watching for comments surrounding the topic.
Key Levels
- USDJPY: Higher -137.30, Lower – 127.00
- EURJPY: Higher – 146.74, Lower – 139.00
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