Ructions & Turmoil

GBP: The British Pound saw a volatile week of trade and opens this morning’s session relatively flat as chaos amongst US and European banks led to readjustments of bets on further monetary tightening from all central banks. In fact, UK stock futures point to a weaker opening than other European markets as investors and traders see some contagion risks in the UK. However, the pound seems to be holding up surprisingly better than other G10 peers this morning. Looking forward, the Bank of England will announce their monetary policy decision on Thursday. While market participants expect a 25-basis point rate hike, it’s closer to a 50/50 call in the current highly volatile environment. Ultimately, market implied probability of a hike is 57% at the time of writing, although a big GBP rally may be prevented by policymakers strongly signalling a pause.

EUR: The Euro started this morning’s trading session on the back foot as investors try to understand whether major central banks will be able to contain the global financial and banking crisis. Over the weekend, UBS Group AG has agreed to buy Credit Suisse Group AG and will reportedly pay $3.23 billion for Credit Suisse, a fraction of its closing market value on Friday. Moreover, the Federal Reserve announced that it will restart offering daily swaps to the Swiss National Bank and the European Central Bank to assist with additional liquidity needs. Although these developments helped the market mood improve, safe-haven flows seem to have returned. Ultimately, investors might be assessing the latest action taken by major central banks as a sign that the liquidity issues could be deeper than initially thought.

USD: The U.S. Dollar rose slightly this morning as markets hunkered down on mounting fears of a banking crisis that has kept sentiment on edge for the past couple of weeks. However, market participants seem cautious over the greenback ahead of the Federal Reserve meeting this week, where the bank is expected to hike rates by 25-basis points. In fact, recent ructions in the banking sector saw markets betting that the Fed will soften its hawkish rhetoric to prevent further economic pressure from high interest rates. Although the Fed, along with other major peers, rolled out emergency liquidity measures over the weekend to support the banking sector and prevent further collapses, markets still remain on edge over more pain from the banking sector. Ultimately, traders are now uncertain over what signals the Fed will send to markets, given that its recent liquidity measures undermine a year-long struggle to tighten monetary conditions and fight inflation.