Written by the Market Insights Team
US equities and the US dollar continue to erase post-election gains, with the latter now down almost 4% against a basket of major currencies. Both the pound and euro remain close to year-to-date highs but are in overbought territory. The Japanese yen is volatile this morning in the wake of the Bank of Japan’s decision to keep rates unchanged, and investors await the Fed’s decision later today for more guidance on the pace and timing of rate cuts in the US.
Equity rout continues pre-Fed
Boris Kovacevic – Global Macro Strategist
Hopes of a continued equity rebound have stalled for now, with investors stepping away from risk assets ahead of today’s Federal Reserve (Fed) decision. The bar for rate cuts has crept higher, driven by concerns that inflation remains uncomfortably sticky. Selling resumed on Wall Street with the largest technology names being hit the hardest.
The S&P 500 fell, dragged lower by megacaps hitting their lowest levels since September. Meta officially turned negative for the year, becoming the last of the so-called Magnificent Seven stocks to erase year-to-date gains. The dollar is once again nearing its lowest level since October, having fallen against the euro and pound in yesterday’s session.
Market participants widely expect the Fed to hold rates steady, leaving the focus on updated economic projections and Chair Jerome Powell’s press conference. Policymakers have signaled a data dependent neutral stance, looking for more evidence of disinflation and greater clarity on the impact of Trump’s policies. Uncertainty surrounding trade has left markets on edge, with investors struggling to price in the full effects of tariffs that appear to change by the week.
Recent data has painted a mixed picture. A stronger-than-expected rebound in single-family housing starts and resilient industrial output have provided some reassurance that the US economy isn’t on the verge of a recession. However, hotter-than-expected import prices added to concerns about inflation becoming entrenched, further complicating the Fed’s path.
Despite softer risk sentiment, the greenback has struggled to capitalize on safe-haven flows, reflecting investor unease over the longer-term impact of Trump’s policies. With Powell set to address the press later today, markets will be watching for any hints about the timing of future cuts. Any signal that rates could remain high for longer may give the dollar a short-term boost, while a more dovish tilt could reignite pressure on the currency.
European confidence making a comeback
George Vessey – Lead FX & Macro Strategist
The outlook is brightening across Europe, buoyed by hopes of Ukraine ceasefire and the passage of a landmark spending package in Germany’s parliament. European equities have outperformed their US counterparts year-to-date, most notably with the German DAX up 17%. The euro is also over 5% stronger than the dollar this year and investors are becoming more optimistic about the future.
Germany’s ZEW Indicator of Economic Sentiment jumped to 51.6 in March, the highest level in over three years, compared to 26 in the previous month and forecasts of 48.1. The last time the indicator increased this substantially was in January 2023. The assessment of the current economic situation remains stable, but it’s the expectations index that depicts the positive impact surrounding Germany’s fiscal policy, including the agreement on a multibillion-euro financial package for the federal budget. Digging into the details, investors’ expectations of rising inflation has risen to the highest level since 2022. Moreover, while over 60% of respondents still expect interest rates to fall, the proportion has sharply dropped from its 1-year average of 80%. This likely reflects the anticipated effects of fiscal loosening and monetary tightening.
Such conditions should be supportive for the common currency, which continues to hold onto the $1.09 handle and well above its 200-day moving average support nearer $1.07. The Fed’s meeting today could inject fresh directional impetus for the pair, but in overbought territory according to the 14-day relative strength index, we’re dubious of further gains in the very short term.
Profit-taking risk ahead of BoE
George Vessey – Lead FX & Macro Strategist
The pound briefly peered above the $1.30 handle yesterday as the US dollar weakened across the board. However, GBP/USD failed to hold above this key level in sign of exhaustion to the upside as several technical indictors are flashing “overbought”. The prospect of a meaningful pullback cannot be discounted in the coming weeks if the pound continues to stall around these levels.
Market participants might also look be looking to sell sterling ahead of Thursday’s Bank of England (BoE) decision, which recent history shows tends to weigh on the UK currency. Although a dovish Fed might jolt the dollar lower today, traders may look to take profit on the more than 7% uplift in GBP/USD since early February. Looking further down the line, the $1.35 mark could be a key level to target to the upside though if the stars align. We’d need global risk sentiment to improve and the US economic outlook to continue worsening alongside rising UK-US yield spreads. GBP/USD has been under $1.35 now for over two years – its longest ever stint below this level. But should the pair hold above $1.30, bullish traders will likely be eying $1.35 as an upside target later this year. From a technical perspective though, we think the 14-day relative strength index being near to or in overbought territory for most of this month suggests a correction lower might be looming in the very short-term before a resumption of the uptrend takes hold.
On the flipside, sterling’s outlook versus the euro doesn’t look so rosy. The bullish narrative we were pushing last month has been turned on its head since Germany’s decision to boost expenditure, which is viewed as a significant moment for the entire European economy and its growth outlook. We see €1.1740 as a key downside target if GBP/EUR closes below its 50-week moving average this week.
Safe haven gold near all-time highs
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 17-21
All times are in GMT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.