KBC Sunrise Market Commentary 15/03/2023 via Trader Talent

The ECB flagged another 50 bps rate hike in March, accompanied by QT. This clear prioritization to combat inflation initially eventually pushed the 10-y Bund to a new cycle top north of 2.50%. The collapse of two US regional bank raised questions on systemic risks, putting in doubt central banks’ future tightening plans and triggering a flight to safe haven assets. We expect the ECB to stick to its plans, while abstaining from new guidance as the banking story develops.

December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. Markets refused to follow this guidance up until the wake-up call coming from this month’s eco data. The US 10-yr yield moved above 4% before the regional bank implosion. Support at 3.5% survived in the aftermath. Stubborn inflation and financial stability risks hang in the balance at next week’s FOMC meeting.

USD lost momentum in Q4. EUR/USD left a downtrend channel improving the technical picture. The euro received support from the ECB’s hawkish twist, lower energy prices and a risk-on sentiment. The dollar regaining momentum on strong US eco data (Jan/Feb). The impact on FX markets from the SVB and Signature Bank collapse/bailout is much smaller than on FI or equity markets.

The BoE raised its policy rate by 50 bps in February, but suggested that rates will peak after a final move in March. The UK central bank that way causes a yield disadvantage for sterling, which already has weak structural cards (e.g. weaker growth prospects, twin deficits, long term brexit consequences …). EUR/GBP for now avoided a return above 0.90 as UK eco data suggest that the BoE has more ground to cover as well.