By Lukman Otunuga, Senior Research Analyst at FXTM
Another wave of risk aversion swept through Asian shares on Tuesday, as the implosion of Silicon Valley Bank (SVB) continued to echo across markets.
The recent developments have fueled fears over a U.S. banking crisis with investors on edge, waiting to see what happens next. Risk-off is likely to remain the name of the game this week as players remain concerned about the financial sector.
In the currency space, there was no love for the dollar as markets reconsidered the Fed’s rate hiking cycle at its meeting next week. Oil prices were under fire, extending heavy losses from Monday, while gold glittered through the chaos, gaining 2.4% in the previous session.
We have seen some huge moves across financial markets over the past few days with events moving at an incredibly rapid pace. From mounting concerns over a U.S. banking crisis to rapidly shifting Fed rate hike expectations and explosive levels of volatility across the FX, equity, and commodity spaces.
Things could spice up further thanks to the pending US inflation data release on Tuesday and the European Central Bank meeting later in the week. In the meantime, a sense of caution is seen capping risk appetite and limiting gains across stock markets.
US CPI data in focus
If not for the recent developments around the SVB crisis, everyone would be eagerly awaiting the pending US figures for February. Although this is still a major risk event, the banking crisis has forced investors to question the Fed’s next move, with a 50bp hike priced out by markets for next week’s FOMC meeting.
Traders now anticipate either no move at all or a 25bp hike which is currently given a probability of 54%, according to Bloomberg. The key question is whether the pending inflation data will shift these expectations.
The headline US CPI figure is expected to show price pressures easing to 6% last month, compared to the 6.4% witnessed in January thanks to falling energy prices.
However, all eyes will be on the core inflation rate which could impact markets.
It will also be interesting to see whether the dollar is thrown a lifeline if the inflation figures print higher than expected. It has been hammered by growing expectations of a less-aggressive Fed as contagion fears intensify.
The Dollar Index remains under pressure on the daily charts with a break below 103.00 encouraging a decline towards 102.30.
Volatile week for EURUSD
It is shaping up to be another wild week for the world’s most traded FX pair.
After gapping higher on Monday, bulls remain in control despite the weakness witnessed early Tuesday.
The recent SVB fallout has fueled speculation about the Fed adopting a more cautious approach toward rates which has ultimately weakened the dollar. This development added to the recent weakness after last Friday’s mixed US jobs report.
The major risk event for the euro this week will be the European Central Bank meeting on Thursday. Given how a 50-basis point hike is still expected, much focus will be on the messaging on the size of rate increases beyond the March meeting. Whatever the outcome, it will be a challenging meeting for the ECB and will set the tone for the euro this month.
Gold
Gold bulls took a breather on Tuesday morning after charging higher in the previous session.
Nevertheless, the path of least resistance points north as the collapse of SVB sent investors sprinting to safety.
Given how the dollar is getting no love and Treasury yields have tumbled, gold prices have the potential to push higher. It will be wise to keep a close eye on how the precious metal reacts to the inflation data Tuesday afternoon.
Looking at the technical picture, the strong break and daily close above $1900 have opened the doors to higher levels. A break above Monday’s high could trigger a move towards $1935 and $1955, respectively. If prices dip back under $1900, bears may target $1873, where the 50-day SMA resides.
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