Calmer Markets After the Storm

Normality Returns After Market Chaos

The well-known quote, “There are decades where nothing happens, and there are weeks where decades happen” springs to mind when thinking about financial markets in the latter part of this month and this quarter. Mind-blowing moves in the bond markets haven’t really been matched by price action in the FX space. Similarly, stock markets have been relatively unscathed with high-growth tech stocks actually enjoying the environment of plunging yields. It will be interesting to see whether we see a reversal in that price action as value companies make a comeback amid tighter financial conditions.

“No news is good news” seems to be the current mantra of investors so far this week. People are waiting for the dust to settle and to see if there are any other blow-ups in the banking sector. For now, the coast seems relatively clear even though the side effects of the recent turmoil are likely to impact the wider economy going forward. Economic activity could be depressed by the more difficult regulatory and credit environment, certainly in the US.

More Pain Ahead for the Dollar?

The dollar has fallen around 3% in the past two week as investors’ expectations that the Fed would raise interest rates have receded. If the calm continues, then markets will refocus on inflation concerns and any news flow around the data. Policymakers were already highly “data-dependent” before the recent tumult so will be even more focused on this as markets still don’t know what the hit to growth will be. It is noteworthy that the greenback has softened since the start of this week as well, despite some unwinding of those dovish Fed bets. From nearly 90bp of rate cuts by year end, money markets have almost halved that number currently.

Euro Flexes Muscles Across FX Space

The euro has outperformed in the last few weeks as worries over the Credit Suisse tremor and subsequent rescue have been well contained. To the surprise of many, the ECB did a decent job of separating financial stability from price stability risks and the focus of the central bank seems to be squarely on inflation. The procession of ECB speakers has remained hawkish with recent speakers suggesting that there is still room to raise rates further.

This rhetoric has shown up in the differences between interest rest between the eurozone and the US which have narrowed substantially. This has helped underpin support for the single currency with the broader trend still constructive. Economic data has proved solid with this week’s all-important German IFO Business Survey beating expectations and many now eyeing up the hugely psychological 1.10 level in EUR/USD. This key benchmark will act major resistance to further upside, especially as it capped prices around there in early February.

Written on 29/03/2023 by Lukman Otunuga, Senior Research Analyst at FXTM

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