Kenanga Research & Investment

Global FX Monthly Outlook - EUR and GBP to Gain From the Dovish Revaluation of the Fed, But Europe’s Banking Crisis May Shift Sentiment

Publish date: Thu, 16 Mar 2023, 09:30 AM

EUR (1.063) ▲

▪ After declining to as low as 1.054 (March 8) against the USD following Fed Powell's hawkish testimony, the EUR rebounded above the 1.070 mark, as market expects the Fed ease its hawkish stance amid the recent collapse of Silicon Valley Bank (SVB). However, the acceleration in the US core CPI reading and the recent banking crisis in Europe have raised market uncertainty and weakened the EUR.

▪ The EUR is poised to gain from the ongoing downward repricing of the Fed fund futures as the market continue to monitor Fed's next action on SVB and awaits Fed policy decision. To add, the EUR may further benefit and potentially trade around the 1.065 – 1.075 zone if the European Central Bank follows through with another 50 basis point rate hike. However, new concerns over Credit Suisse may worsened market sentiment and pressure the bloc’s currency.

GBP (1.207) ▲

▪ The decline of the USD index (DXY) following the SVB fiasco has helped the GBP to recoup some of its losses against the greenback over the past few weeks. Domestically, the pound was supported by solid employment data, upbeat UK GDP reading of 0.3% MoM (consensus: 0.1%) and optimistic UK spring budget. However, soaring risk aversion due to the growing banking crisis has capped sterling’s upside.

▪ As the DXY may continue to experience downward pressure due to the US banking crisis and the Fed potentially adopting a less hawkish stance, the GBP is anticipated to appreciate towards the 1.21 level by end-March. Nevertheless, if the Bank of England decides to shift towards a pause in its March meeting and if the global banking crisis continue to worsen, the GBP may be negatively impacted.

Source: Kenanga Research - 16 Mar 2023

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