The US dollar ended in deep red on Wednesday. The coin traded near its five-week lows against most major currencies. The US Federal Reserve meeting is today and investors are eagerly awaiting its conclusion. They speculate whether the central bank will raise its interest rates or not. The recent banking problems stemming from the collapse of two regional US banks caused a lot of concern and uncertainty in the markets. Traders believe the government could decide to keep the rate at its current level to avoid an economic downturn.
Furthermore, surveys showed that market participants bet on only a quarter point increase in US rates. However, they are also awaiting comments from Chairman Jerome Powell, hoping to get some clues on the crisis. Considering that the bank failure severely shook global markets, the next steps of the US government will show how serious it considers the current situation and whether it plans to take any measures.
Fiona Cincotta, the strategist at City Index, noted that analysts expect the Fed to raise rates today, even if it doesn’t deliver a big hike. She added that there is no reason for the central bank to back down. After its collapse, the Federal Reserve already earmarked its funds to help regional banks. Other major central banks also participated, trying to mitigate any lasting effects on the global banking sector.
The Credit Suisse implosion, along with the bankruptcy of several smaller US lenders the previous weekend, caused a lot of turmoil and volatility in financial markets. However, UBS took over Credit Suisse, while the US government and major central banks around the world joined in to help vulnerable regional institutions. Therefore, the market sentiment improved significantly in the last few days.
What do the analysts say?
The focus will be on how the US central bank announces its forward guidance, said Christopher Wong, currency strategist at OCBC. He added that ideally, the Fed would deliver a 25 basis point hike at this meeting, as well as continue its hawkish policy. In such a case, the dollar could strengthen after losing a substantial amount in the last few days.
Meanwhile, the British pound advanced on Wednesday. It earned the most among the G10 currencies. Overall, the British pound was up 0.5% against the dollar, changing hands at $1.2279. According to new data, UK inflation spiked to a higher point in February than analysts had forecast. That means the Bank of England might have to keep raising rates. The next BOE meeting is Thursday.
Colin Asher, senior economist at Mizuho Bank, noted that the central bank would likely deliver a 25bp hike tomorrow. However, it could decide to be more cautious and keep rates at their current level. Officials are already monitoring developments in the financial sector and will likely continue to do so in the coming weeks.
Still, polls showed most traders priced in a 25 basis point hike today, while on Tuesday the chances of the BOE standing firm or raising rates by a quarter point were 50/50.
On Wednesday, the common currency fell against the pound sterling. The euro fell 0.3%, finally trading at 87.81 pence. However, it rallied 0.2% against the US dollar, eventually trading at $1.0795.
On the other hand, the dollar managed to gain 0.4% against the Japanese yen at 132.98. But he declined against the Australian. The latter rose 0.3% to $0.6688, while the New Zealand dollar jumped to $0.621.
What about emerging market currencies?
Most emerging Asian currencies are muted today. The Philippine peso traded in the red, losing more during this session. The currency looked poised to break its five-day winning streak. Overall, it was down 0.4%. The Thai baht was flat, while currencies in other parts of the region moved in limited trading ranges. However, the Singapore dollar was flat, along with the Malaysian ringgit.
Meanwhile, the South Korean won rose 0.3%. On Wednesday, the rupee rose 2.6% in Sri Lanka. The country is currently facing its worst financial crisis in seven decades. But President Ranil Wickremesinghe announced today that the government has already received the first funds from an IMF bailout program. Overall, he should get $330 million. The International Monetary Fund on Monday approved the first part of a nearly $3 billion bailout.
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