The dollar index hovered near its weakest levels in a month at 103.7 as investors reconsidered Federal Reserve policy prospects amidst recent US banking system upheaval and the inflation figures. Investors scaled back their expectations of U.S. rate cuts and the fear of a banking meltdown eased. Meanwhile, with an impending ECB rate hike, the euro remained quite resilient.
The EUR/USD price spiked to a one-month high near $1.0760 before reverting back to $1.0734 as the recent downturn in dollar value appeared to be calming down. The European Central Bank is scheduled to meet on Thursday and is expected to deliver a 0.5 bps rate hike in order to tame the bloc’s hot inflation.
The GBP/USD stayed well above the $1.21 mark, near its highest rate since February 21st. This month, the Bank of England is expected to raise rates by a further 25 basis points – its 11th consecutive rate hike – before concluding this round of rate increases.
The recent gains in the British pound, Australian dollar and New Zealand dollar against the dollar have started to wane, without any major losses so far.
The Japanese yen declined to below 135 per dollar, retreating from its one-month peaks after the minutes of the Bank of Japan’s January meeting demonstrated that members reiterated their need for ultra-easy policies. They illuminated that it will take time to attain and maintain a stable 2% inflation target.
At Governor Haruhiko Kuroda’s final policy meeting before retirement, the Bank of Japan maintained their ultra-low interest rate strategy unchanged. The bank also gave no indication that its yield curve control would change in any way, reinforcing speeches from recent policymakers about holding off on major policy changes until Kazuo Ueda assumes his role as central bank head next April.
Dollar Recovers on Calming Fears
This week, the US dollar encountered intense selling pressure as doubts rose that the Fed could halt its tightening plan in order to prevent further damage to the financial system due to Silicon Valley Bank collapse.
The US dollar index (DXY), which gauges the greenback against a basket of six currencies, is up 0.10 at 103.70, recovering from a four-day plunge near the 103.00 mark.
Despite that the resurgence of bets that the Fed will reverse course in the near future is keeping pressure on the greenback, higher inflation and a resilient US economy remain formidable opponents to this perspective.
Investors remain vigilant, watching the repercussions of the SVB collapse and how it may influence the Federal Reserve Board’s interest rate decision next week.
A week ago, markets forecasted a similar probability of a 50 bp rate hike. Today however, amid crisis concerns, traders believe there is a decent chance of holding rates unchanged and potentially steep cuts later this year.
Latest figures showed that the US annual inflation rate dropped to a 9-month low of 6% in February, aligning with predictions. Markets are now forecasting an 80% probability of a 25 basis point interest rate increase by the Federal Reserve next week; compared to half-percentage point hike anticipated one week ago.
US traders will be eagerly awaiting the release of Producer Prices and Retail Sales figures later on Wednesday.
Gold Down from Monthly Highs
Despite recent pullback, gold is still hovering near its highest levels in over a month as investors reconsider the Federal Reserve’s monetary policy approach. The precious metal has gained approximately 2% this week due to worries surrounding Silicon Valley Bank and Signature Bank, leading to conjecture that the Fed will pause their tightening efforts out of caution for potential financial system risks.
Gold currently sitting below $1,900 per ounce, with 0.8% daily loss.
Tuesday saw gold futures markets experience a decrease in open interest for the second day running, this time dropping by over 8 thousand contracts. Volume mirrored this trend and dropped 274.5K contracts, reversing three straight days of gains. Read Gold Outlook 2023