Calm returns with all eyes on Fed next: US dollar, AUD/USD, GBP/EUR

Market Recap

The absence of any negative developments in the banking sector has further brought calm to the risk environment overnight, with all three major US indices heading higher for the second straight day (DJIA +0.98%; S&P 500 +1.30%; US Tech 100 +1.58%). The idea of temporarily increasing deposit insurance without congressional approval has also been floated. Any successful implementation will be a crucial step to mitigating the US banking crisis, but the lack of consensus behind the idea still makes it a hard one to pass. At the very least, it shows that authorities continue to have their eyes on the turmoil and are prepared to step in with further tools to support community banks if needed.

As we head into the Federal Reserve (Fed) meeting, expectations have been rooted that the Fed will take on a reassuring stance. A 25 basis-point rate hike is the clear market consensus (85% probability being priced), providing somewhat of a middle ground to push on with the fight against inflation but also to offer some flexibility in its policies if the banking instabilities worsen. A dovish take from the central bank could provide further support for risk sentiments, with the opportunity for bears capitulation given previous downbeat environment.

Overnight, the risk-on tone has triggered some profit-taking in safe-haven gold prices (-1.9%), after benefitting from safe-haven flows over the past week. The US dollar is trading lower as well, with the push below its 103.12 level forming a new lower low and supporting a near-term downward bias. This may leave the 101.30 level on watch next, largely dependent on how the Fed balances its inflation goal and stabilising the short-term instabilities.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.45%, ASX +0.87% and KOSPI +0.66% at the time of writing. The economic calendar remains quiet, pointing to some wait-and-see ahead of the upcoming Fed’s decision. The friendship visit between Xi Jinping and Vladimir Putin may warrant some attention, but the end-results seem to be a more prolonged war in Ukraine as China’s portrayal of its “impartial position” makes it less likely that they will push aggressively for a peace plan. Implications could be longer-term, with the ongoing decoupling of ties with the US making any future restoration a difficult process.

While the risk-on environment has supported some renewed traction for risk-sensitive assets, that does not seem to be felt as strongly by the AUD/USD. The recent Reserve Bank of Australia (RBA) meeting minutes seem to have a limiting effect on gains, with the reconsideration of a rate pause by policymakers looked upon as a dovish takeaway. Nevertheless, this will be pitted against Fed policymakers’ views later this week, who are also inclined to adopt a less hawkish stance in light of recent banking instabilities. Greater conviction for the bulls may have to come from a move back above the 0.680 level to overturn the lower-high narrative. This will also allow the pair to reclaim its 200-day moving average (MA) as a signal for a longer-term upward trend.

On the watchlist: GBP/EUR retracing from trendline resistance ahead of BoE meeting

Abating banking jitters in the Eurozone have aided to build some confidence in the euro overnight, with the GBP/EUR retracing sharply from a downward trendline resistance. Further ahead, its 200-day MA remains another key resistance line overcome as well. Attention will be shifted to the upcoming Bank of England (BoE) meeting next, with the monetary policy divergence story with the European Central Bank (ECB) in focus. While the dropping of the ECB’s forward guidance was previously viewed as a step-down in hawkishness, the BoE is expected to deliver its last 25 basis-point hike this week before switching to a rate pause. Further downside may leave the 1.124 level on watch next and the overall bearish bias may hold until the downward trendline and 200-day MA are overcome.

Tuesday: DJIA +0.98%; S&P 500 +1.30%; Nasdaq +1.58%, DAX +1.75%, FTSE +1.79%