By Han Tan, Chief Market Analyst at Exinity Group
A week is indeed a long time in financial markets, and the calculus for central bank rate hikes has been dramatically altered by the SVB and Credit Suisse crises in recent days.
The market’s prior foregone conclusion of a 50-bps hike by the European Central Bank has been whittled down to a coin toss. A 50bp hike may be too much for now, in light of the still-fragile sentiment surrounding the banking sector on both sides of the Atlantic.
The ECB’s dilemma pits consumer price stability against financial systemic stability, and markets will be attuned to where the ECB’s bias lies.
The central bank’s policy signals later Thursday could serve as a canary in the coal mine, at least ahead of the U.S. Fed’s meeting next week, as contagion fears continue to permeate financial markets.
SNB to the rescue
Although Eurozone assets, including the bloc’s currency and equity markets, are finding relief in the fact that the SNB has come to Credit Suisse’s aid, traders and investors are still highly sensitive to the ECB’s current take on matters.
A hawkish 25bp hike, suggesting that the ECB views this Credit Suisse crisis as transitory, could push EURUSD closer to 1.0690. Such a bullish move would have to be predicated on the belief that the ECB can extend its rate hike cycle and preserve its inflation-fighting credibility without incurring too much damage along the way.
However, a more cautious pause would suggest that policymakers are now increasingly wary about financial stability risks, serving instead as a negative loop to drag the euro lower against its G10 peers.
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