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14 March 2023

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

Inflation data and central bank policy took a back seat late last week to the news coming out of California that the record fast increase in US rates had claimed its first major victim: a mid-size bank that had severely mismanaged its interest rate management.

tocks fell into Friday close, and the traditional risk havens in currency markets, the Swiss franc and the Japanese yen, topped the charts. Notably, the euro was flat and sterling managed even a small rise, in a sign that markets see the problems circumscribed to the US. The collapse of SVB, combined with Friday’s mixed US payrolls report, has also led to a violent downward repricing in US rate expectations in the past few days, which has further weighed on the dollar. A 50bp hike from the Fed in March, which appeared to be telegraphed by FOMC chair Powell on Tuesday, now appears firmly off the table.

Since Friday close, we have seen forceful intervention to stem any potential bank runs by US bank authorities, while HSBC has stepped in to buy the UK arm of Silicon Valley Bank. We think that the intervention will be sufficient to restore calm to US regional bank depositors, and currency markets will go back to focusing on inflation data and central bank policy. This week is a critical one on that front, as the February CPI inflation report is released on Tuesday. This will be followed by the ECB March meeting on Thursday, where a 50bp hike is widely expected and unlikely to be derailed by US bank troubles.


Newsflow out of the UK continues to confirm a resilient economy, and a recession there is becoming increasingly less likely. This, combined with sticky inflation, leads us to believe that the Bank of England will be forced into yet another volte face away from its recent dovishness, in line with the increased concern we are seeing out of the ECB.

This week’s UK labour report is likely to be likewise strong, in terms of both job creation and wage increases. We remain positive on the pound over the medium-term, and think the two further rate increases priced in by the markets are insufficient.


The European economy continues to outperform expectations, as do inflationary pressures, and this means a 50bp is all but certain at this week’s European Central Bank meeting. We expect a sharp upward revision to the 2023 core inflation expectations in the staff forecasts, a thoroughly hawkish press conference, and clear indications that another jumbo hike is in the cards at the next meeting.

In line with the dialling back in US rate expectations, we have seen a similar, albeit more modest, retracement in the expected terminal ECB rate. As mentioned, we think that the impact of the SVP collapse will be contained to the US, and this ensures that we still think expectations for the terminal euro rate are too low. As and when these are correct, we expect the euro to resume its upward trend.


While it was overshadowed by the news from SIlicon Valley Bank, the US payrolls report for February contained some tentative, but meaningful, signs of labour market loosening, news that the Fed should welcome. Banking fears should probably be assuaged by the decisive measures taken over the weekend, including a full deposit guarantee, but this probably makes the Fed more reluctant to hike rates, which is providing clear headwinds for the dollar.

This Tuesday’s US inflation report remains an important one for Fed policy. We expect to see further signs that the core inflation rate is stabilising around an unacceptable 5% annualised rate, which means the above mentioned reluctance to hike may not be long lived. That said, we will now need to see a sizable surprise to the upside for investors to again consider the possibility of a 50bp hike from the Fed later this month.

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