USD falling but risk appetite remains fragile
- Authorities battle to contain contagion in the US banking sector: SVB deposits have been covered by the FDIC in the US, whilst Signature Bank also collapses.
- Fed rate hike expectations plummet: A 50bps hike on 22nd March is now entirely priced out
- USD struggling as yields plummet: The USD is being sold on major forex.
- US equities rebound, Europe more cautious: US futures rally sharply but European indices have been unable to recover Friday’s losses.
- Precious metals recovering well: In commodities, gold and especially silver are strong.
US authorities try to restrict contagion
The US Treasury and its banking authorities have moved swiftly to try and prevent the fallout of the failure of Silicon Valley Bank through the system.
This comes as another regional bank in the US, Signature Bank in New York has also collapsed.
The Federal Deposit Insurance Corporation (FDIC) will cover all depositors at both banks (although bondholders and shareholders are not so lucky).
SVB’s subsidiary assets in the UK have been bought by HSBC.
The broader market implications, as Fed hike expectations plummet
The threat of contagion is a risk that can move quickly through markets. Certainly, this is the case with bond markets and expectations of rate hikes by the Federal Reserve.
The source of the issues faced by these regional US banks has been the aggressive monetary policy of the Federal Reserve.
Amidst this turmoil and the need for US authorities to step in the prevent significant systemic issues, markets are having a significant re-pricing of potential further rate hikes.
US Treasury bond yields have plunged.
The 2-year Treasury yield has fallen from 5.08% on Wednesday to 4.46% this morning.
The 2-year yield is seen as a proxy for where the Fed Funds rate will be. Such a fall suggests that two 25bps rate hikes have been suddenly priced out.
According to the CME Group FedWatch tool, from having priced around a 70% probability for a 50bps hike in March just a few days ago, that probability is now just 5%.
This has also significantly impacted the outlook for the peak of the Fed Funds rate. The terminal rate hit 5.69% last Wednesday. It is now down at 5.08%.
That means that on today’s pricing, markets anticipate just two more 25bps hikes.
Goldman Sachs has been quick to call that the Fed will hold rates steady in the meeting next week, although they see three 25bps hikes in the meetings from May.
If the actions of the US authorities have successfully contained the situation, there is plenty of room for this to swing higher once more. There is likely to be elevated volatility around major markets for a while.
USD has fallen sharply, precious metals are higher, US equities rebound
The USD is normally a safe haven trade, but not for now.
There is a significant knee-jerk selling pressure that has taken hold. It will be interesting to see whether this may now have already played out though. USD pairs are fairly stable moving into the European session on Monday morning.
The Dollar Index has fallen sharply in the past couple of sessions. From a technical analysis perspective, the reaction to the support band around 103.40/104.09 will now be a key gauge.
Elsewhere, precious metals have also rebounded strongly in the past couple of sessions. US equities are set to rebound from Friday’s lows but futures are starting to tail off once more into Monday’s European session.
USD sell-off, for now
With volatility still heightened, there is much uncertainty about the recent moves. Will there be another unwind if the dust begins to settle, or is there more to come?
The reaction when US trading takes hold later could be an important signal.
EUR/USD needs to hold above 1.0694
The pair rallied on Friday to move above 1.0694 resistance. This is the first rally above an important resistance since the market turned lower in early February.
- This move is also above the falling 21 day moving average (which had become a basis of resistance)
- The daily RSI is also above 50 for the first time since February
Holding this breakout will now be seen as an important step to sustaining the improvement.
Above 1.0804 would re-open the key 1.1033 high.
Gold (XAUUSD) needs to hold above $1858
The breakout above $1858 has completed a small double bottom base pattern which implies c. +$49 of upside from the neckline breakout.
Already the resistance at $1890 has been tested.
- Importantly though the market is trading back above the 21 and 55-day moving averages.
- The daily RSI is also back above 50
This all points to an improving technical outlook once more.
The bulls will be keen to hold on to the breakout support around $1858 now.
A close above $1890 re-opens the February high at $1960.
S&P 500 futures still have more to do for recovery
US equities are looking to rebound, but the outlook remains corrective.
On the S&P 500 futures, there has been a pick-up from Friday’s low at 3846 but this is still playing out within the confines of a six-week downtrend channel.
- The market is still under the shorter 21 and 55-day moving averages
- The daily RSI remains correctively configured in the mid-30s
Support and resistance levels for Forex, Commodities, and Futures/Indices
|Brent Crude Oil
|S&P 500 futures
|FTSE 100 Index
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