Here's what investors need to know for Wednesday, March 22:
Major U.S. stock indexes rose sharply on Wednesday ahead of the Fed's decision, led by regional banks. Shares of First Republic Bank rose 29%. The Dow rose 0.98% and the Nasdaq rose 1.58%. Concerns about the banking sector continued to ease, paving the way for further policy tightening by central banks.
U.S. Treasury Secretary Janet Yellen said the U.S. banking system was sound, noting that the government was prepared to do more to help bank depositors.
This follows synchronized action by the Federal Reserve to inject liquidity into US markets through swap lines and the discount window. These actions are already showing up on the Fed's balance sheet, as there has been a surge amid ongoing quantitative tightening. The moves eased concerns among some banks, leading to risk appetite in markets on Tuesday.
The developments at the banks led investors to widen their risk appetite to absorb another 25 basis point rate hike by the Federal Reserve on Wednesday. The market expects an 85% chance that the Fed will raise interest rates by 25 basis points. The Fed's benchmark overnight interest rate peaked at 5.5 percent a few weeks ago and is now only around 4.8 percent. However, some analysts expect the Fed to keep policy unchanged and even call for a rate cut.
The rapid changes in the banking sector have the Fed refocusing on the path of inflation, which remains well above its 2 percent target. The Fed's main battle may be dealing with soaring inflation. The Fed has made it clear that they can ease monetary policy if necessary while maintaining a cycle of rate hikes.
A deviation of 25 basis points from the Fed rate decision and rate hike could trigger extreme volatility, which is highly unlikely. With the Fed's summary of its economic forecasts ahead of the turmoil in the banking sector, focus will turn to the dot plots, policy statement and press conference.
U.S. Treasury yields rose sharply, with the 10-year yield hitting 3.60% and the 2-year yield hitting 4.17%. Germany's 10-year bond yield jumped nearly 8% to 2.29%.
U.S. economic data showed that existing home sales rose 14.5% in February to 4.58 million units, beating market expectations by 5% and recording the largest monthly increase since December 2015 (excluding the turbulent COVID-19 pandemic period) . The Philadelphia Fed's non-manufacturing index fell to -12.8 in March.
Analysts will be closely watching Fed rate decisions, forecasts, statements and speeches from Powell. Therefore, traders should expect greater market volatility during the U.S. trading hours.
EUR/USD is up for the fourth day in a row, approaching 1.0800 on Tuesday. EUR/USD hit a monthly high before losing momentum. The euro was one of the biggest winners as the banking crisis eased, suggesting the European Central Bank (ECB) could raise interest rates further if necessary.
"There is still some way to go, but we are approaching restrictive territory," European Central Bank (ECB) policymaker Joachim Nagel, president of the Bundesbank, told the Financial Times (FT) on Wednesday. "The above comments failed to affect the euro.
EUR/USD hovered around 1.0770-1.0780 in Asian market on Wednesday, as market anxiety rose before the announcement of the Fed decision. European Central Bank President Christine Lagarde's speech also strengthened the cautious market sentiment, and at the same time formed an ascending triangle pattern since March 1.
However, it should be noted that the successful rebound of the euro from the 100-day moving average, coupled with the bullish MACD signal, and the relative strength index (RSI) is optimistic that it is not overbought, which makes the bulls hopeful.
GBP/USD eased from a six-week high around 1.2300 to 1.2178 before climbing above 1.2200.
GBP/USD regained positive traction after retracing the previous day from its highest level since February 2, and continued to rise during the European morning session on Wednesday. Buying interest picked up pace following the release of UK consumer inflation data, pushing GBP/USD to fresh intraday highs, breaching the 1.2250 level in the last hour.
The Office for National Statistics (ONS) reported that headline CPI rose more than expected in February, coming in at 1.1%, after falling 0.6% in the previous month. Also, the annual rate in the reporting month unexpectedly climbed to 10.4% from 10.1% in January, again beating market expectations. The data increased pressure on the Bank of England (BoE) to raise interest rates by at least 25 basis points on Thursday and provided a modest boost to sterling.
The dollar, on the other hand, hovered near multi-week lows amid the prospect of a less aggressive Fed tightening policy. Indeed, the market seems convinced that the U.S. central bank will soften its hawkish stance and offer a smaller 25 basis points at the conclusion of the two-day FOMC policy meeting later this Wednesday. Aside from that, a slight pullback in U.S. Treasury yields and easing fears of a full-blown banking crisis weakened the safe-haven dollar.
However, upside for GBP/USD appears limited as traders may prefer to turn to the sidelines heading into key central bank event risks - Wednesday's high-profile Fed decision followed by Thursday's BoE meeting. Therefore, any subsequent uptick is likely to disappear quickly. That said, a sustained move above the weekly swing high, around 1.2285, will be seen as a new trigger for bulls and paves the way for further appreciation.
Boosted by rising government bond yields, USD/JPY closed up to the 132.50 area on Tuesday, notching its best day in two weeks. The yen was also affected by safe-haven funds.
USD/JPY hovers around 132.50 amid weaker US Treasury yields and calmer US futures markets. Speaking to a group of bankers on Tuesday, U.S. Treasury Secretary Janet Yellen proposed extending the federal deposit guarantee to all small U.S. banks.
In early Asian trading on Wednesday, Japanese Chief Cabinet Secretary Hirokazu Matsuno said: "We will allocate 2 trillion yen from foreign exchange reserves to cushion the blow to the economy from rising prices."
USD/CHF fell from above 0.9300 to 0.9200. The Swiss National Bank (SNB) will announce its monetary policy decision on Thursday. The market generally expects the SNB to raise interest rates by 50 basis points; however, some analysts expect the rate hike to be smaller given recent market volatility and an uncertain outlook for the Swiss banking system.
USD/CAD rebounded sharply to 1.3740 from below the key regional weekly low of 1.3650. Canadian inflation data showed that the consumer price index fell to 5.2% from 5.9%, the lowest level in 13 months. The Canadian dollar rose for a second straight day against the Australian and New Zealand dollars.
AUD/USD and NZD/USD eased from their weekly highs to 0.6175 and 0.6650 respectively, despite an improvement in global market sentiment. Minutes from the Reserve Bank of Australia (RBA) meeting showed the central bank is considering suspending its next meeting.
On Tuesday, Ripple jumped 30% and Bitcoin rose 1.50% to close at $28,280. It continued to trade in a tight range above $28,000 early Wednesday. After falling nearly 3% on Monday, ethereum regained traction on Tuesday, rising nearly 4%. ETH/USD is oscillating in a narrow channel around $1,800 early in the European session. The largest cryptocurrency is up 70% so far in 2023.
Dragged down by soaring U.S. Treasury yields, gold prices in London corrected further downward, falling $30 and bottoming out around $1,935.
Crude oil prices rose again, extending the rebound from multi-month lows. WTI oil prices rose 2.49% to near $70.00, driven by improved financial market sentiment.
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JRFX reminds you: the market is risky, and investment needs to be cautious. This article does not constitute personal investment advice. Please choose corresponding investment products according to your own financial and risk tolerance, and do a good job in corresponding risk control.
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