Bank failure pours doubt on US rate plans

The failure of US Silicon Valley Bank sent shudders through the investor world at the end of last week. Nervous investors tend to buy US assets but it is those US assets that are causing the concern. Hence the US dollar weakened on Thursday and Friday and remains weak this morning. The logic battle is between the fact that the US economy added 311,000 jobs in February and has averaged roughly 350,000 new jobs over the last three months. So, were it not for the first US bank failure since Lehman Brothers, the Fed would be inking in a rate hike at their next meeting. Will they need to postpone or cancel that hike if investor confidence is so thoroughly rocked? (Answers on a postcard to…….). For now, the pound has push up after strong GDP data and the GBPUSD rate has risen to $1.2115. These are the highest levels in March. The EURUSD rate has also risen, to $1.0730 in this case, the best levels since mid-February. We will see US inflation and retail sales this week but they are likely to be overlooked while this banking concern remains.

GBP stronger but Spring Budget on Wednesday

UK economic growth bounced back in January after a sharp drop in December. Strikes in December look likely to have been a part of that dip but the 0.3% growth in GDP for January does make the doom-laden forecasts of recession look less likely. Mind you, since when did central banks start to make accurate forecasts? So, this morning, although the pound was a tad stronger on Friday, it remains well supported today. The GBPUSD and GBPEUR rates are mentioned elsewhere in this report but the pound is also up against the Aussie dollar at AUD 1.8150 (having been near to AUD 1.83 on Friday. It is also up to NZD 1.9545 (down a cent from Friday’s highs) and above 1.66 against the Canadian dollar. The GBPZAR rate is up to R21.92, levels we haven’t seen since August 2020. The only tier one data we have from the UK this week are the employment numbers tomorrow. The Bank of England will be watching very closely though as they contemplate their next rate setting move but we have a Spring Budget from the Chancellor on Wednesday. It isn’t likely Jeremy Hunt will have a lot of leeway to impact the markets though.  

ECB rate hike due on Thursday

The euro is being boosted by investors who are selling the US dollar for all the reasons stated above. It may get another boost if the European Central Bank hikes the eurozone base rate by 50 basis points on Thursday. That decision is highly likely, given the rhetoric we have had from the ECB in the past month and the stubbornly high level of inflation in the eurozone. The GBPEUR rate is around €1.1285 this morning but it was higher on Friday. As mentioned above, the weakness of the US dollar has allowed the EURUSD rate to rally to $1.0730.