Euro and sterling remained firm on Wednesday. Why’s that?
The euro fluctuated on Wednesday. The currency hit a monthly peak of $1.0760 earlier in the session. However, it dropped again later and traded flat at $1.0730.
Meanwhile, the British pound declined by 0.11%. It exchanged hands at $1.2146 versus the U.S. dollar. On the other hand, the sterling was steady at 88.24 against the common currency. Investors are waiting for finance minister Jeremy Hunt’s speech about the British Budget. They expect Hunt to introduce his plans for bolstering the U.K.’s economy. His speech is due later today.
The European Central Bank will also announce how it will proceed with an interest rate hike tomorrow. While that news will likely influence the forex market’s course, thus far, the euro and sterling both remain firm. The U.S. dollar also steadied significantly after the initial crisis caused by the Silicon Valley Bank’s collapse.
Chris Turner, the global head of markets at ING, noted that there’s little chance of the sterling declining due to anything in the new Budget. After all, taxation levels are already near the limit. However, it shouldn’t help the currency much, as well.
Economists also commented on the ECB rate hikes. Currently, forex markets are pricing in a 90% chance of the central bank delivering a 50 basis point increase. That is a bigger hike than investors expect from the U.S. central bank next week.
How is the U.S. dollar trading now?
The greenback surged forward against the Japanese yen, another safe-haven currency. It jumped by 0.16%, exchanging hands at 134.45 yen at last. However, reports say that in recent months, Japan made the biggest pay increases in the last 25 years. That will likely pressure its central bank to make some changes in its ultra-easy monetary policy.
Moreover, three U.S. banks collapsed in the last several days, causing much turmoil in the financial markets. Despite that, banking shares rebounded, while bonds and interest rate futures lost some of their substantial gains on Wednesday. Analysts think that investors are much calmer now, as some time elapsed after the Silicon Valley Bank’s (SVB) failure last week. It seems traders no longer fear that this event will prove contagious to other U.S. banks.
Besides, the forecasts for U.S. rate hikes improved, as well. Immediately after the SVB’s collapse, investors bet that the Federal Reserve wouldn’t increase rates due to the problems it faced. However, now the market players think that there is an 80% chance of the agency delivering a 25-basis point raise. Polls indicated a 50% chance of a 50 bp increase last week. So, while the chance of a rate hike increase, its possible percentage decreases to half.
Westpac strategist Imre Speizer stated that after the current market turmoil abates more thoroughly, the greenback will likely emerge a bit weakened than it is now. The investors will also focus on the flow of various economic data. He also thinks that the Federal Reserve announced a lower hike than traders priced in a week ago. That would also contribute to the dollar’s weakness.
In February, U.S. consumer prices surged forward, as well. The rising inflation weighs on the central bank, pushing it to deliver new hikes to fight the soaring prices.
On Wednesday, the Swiss franc continued rallying. This safe-haven currency jumped by almost 3% in a week. That fact also hints at the investors’ fears.
What about the EM Currencies?
Southeast Asian stocks and currencies traded in the green today. The Philippine peso has gained the most thus far. China retail sales also rebounded, bolstering investor sentiment. The Philippine peso increased by 0.3%. The Malaysian ringgit added the same amount in this session. The ringgit seemed set for its fifth consecutive day of gains. Moreover, the Indonesian rupiah exchanged hands a bit higher, as well.
On Wednesday, the Philippine peso rallied, bolstered by the outlook on rate hikes. In February, the country’s central bank announced that it might increase interest rates by a quarter of a percentage point once more in 2023.
Nicholas Mapa, the Senior Economist, Philippines at ING, noted that the Bangko Sentral ng Pilipinas would likely be the last major central bank to increase rates in the region. Philippine inflation skyrocketed by more than 8% in the first month of this year. Several other central banks have already paused tightening policy. Even the Federal Reserve discusses taking a less aggressive stance.