© Reuters.
By Geoffrey Smith
Investing.com – The American is now rising to 103.49 after the release of US inflation data at a time when yields are regaining their ascent, especially the yields of two-year Treasury bonds, which experienced a historic decline for 3 days in a row with the fall of Silicon Valley Bank, but they have risen again after Statement of support by the Federal Reserve and the Federal Deposit Insurance Corporation announcing that all deposits will be refunded without losses whether insured or uninsured.
The dollar witnessed a violent decline yesterday, Monday, with the fall of Treasury yields and the collapse of Signature, Silvergate, and Silicon Valley banks, along with First Bank. This, along with the rise in the unemployment rate to 3.6%, stimulated the markets to believe that the Federal Reserve will expect to raise interest rates at its next meeting, which would lower the dollar. However, the positive inflation data today and the return of relative stability to the markets brought the dollar back to the bullish range again.
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Economic situation
Signs of stress in the US financial system have caused a sharp reassessment of expectations across the US and Europe since Thursday, with US bond yields dropping by the most in three days since the 1987 market crash. 25 bps from the Fed next week, the market views a 50 bps increase as the next most likely outcome, and most of the market now expects no change. Analysts at Nomura have gone so far as to predict that the Fed will cut its target range for federal funds by 25 basis points.
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US inflation data was moderate and in line with expectations, as the headline CPI rose by 6.0% on an annual basis, which is a decline from its previous reading of 6.4%. All measures of the CPI declined except for the core CPI on a monthly basis, which rose by 0.5. % While experts expected it to maintain its rise by 0.4%, as stated in previous readings.
Interest expectations now return that the Fed will raise interest rates by 25 basis points at the next March meeting.
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Dollar and foreign currencies
The dollar’s gains have largely come against the euro, which has outperformed since Thursday simply because the European Central Bank committed itself roughly 50 basis points at its policy meeting on Thursday. This means that the main variable in the ECB meeting will be President Christine Lagarde’s guidance for future meetings, which many now expect to be less hawkish than her recent public comments.
In her latest appearance, Lagarde appeared to be more on the side of the hardliners who pay about 50 basis points later in the year. This possibility is now receding, according to Berenberg Bank chief economist Holger Schmieding, in part because events in the banking system will lead to a tightening of financial conditions in both the US and the eurozone.
“If markets expect more, the ECB should go lower,” Schmieding said in a note to clients.
Also, it fell 0.3% to $1.0692, giving up some of the 2% gain over the past three days. It also weakened slightly after rising nearly 3% against the dollar over the past week. By 04:00 ET, it was down 0.3% at $1.2148.
Sterling remains supported by labor market data showing a larger-than-expected increase in employment in the three months to January which kept the unemployment rate at a historically low level of 3.7%. The growth in average earnings was weaker than the record levels recorded in the past two months.
The BoE’s next policy meeting is next week, the day after the Fed’s meeting. However, the pound is facing some risks this week, as next year’s new government is due to be presented to parliament on Wednesday.
