Spectrum FX Daily Report

GBP:?The British Pound continues to gain ground and has become 2023’s best-performing developed market currency, despite the global banking sector stress. In fact, Sterling had entered March as a mid-performer for 2023 but has seen its value increase over recent days as investors take fright of stresses in the global banking sector. The outperformance comes as a surprise given the Pound is not traditionally associated with a 'safe haven' status; but signs of banking turmoil in the U.S. and Europe contrast with the UK's major banks which have steered clear of the headlines, suggesting the sector to be well positioned. Ultimately, Britain’s banks so far have not been under investor’s microscope, and the zero usage of the Bank of England’s U.S. dollar liquidity swap line on Monday suggests that stress levels within the U.K. banking system currently are low – thus, supporting Sterling’s recent gains.

EUR:?The Euro has been clawing back recent losses and European shares rose nearly 1% this morning, with banking stocks leading the recovery following a raft of measures to stabilise the sector. In fact, Banking stocks globally breathed a sigh of relief yesterday after UBS's state-backed takeover of the 167-year-old Credit Suisse raised hopes that a wider banking crisis was averted in the near-term, although worries lingered about smaller U.S. banks and the damage to credit markets. However, the President of the ECB, Christine Lagarde, whose policy committee hiked rates by 50-basis points last week, said that inflation is expected to continue excessively high for a more extended period. Ultimately, she added that there’s no trade-off between inflation and financial stability, and without tensions, the ECB would’ve indicated that additional rate hikes were required.

USD:?The U.S. dollar held its ground in early European trade this morning but has struggled to climb much above recent five-week lows ahead of the start of the latest Federal Reserve policy-setting meeting. In fact, the Dollar Index traded around 103.2, having earlier fallen below 103 for the first time since mid-February. The ongoing turbulence in the banking sector has weighed upon the U.S. dollar, as traders have begun to price in the expectation that this banking stress will keep the Federal Reserve from hiking rates much further, or at all, later in the week. Ultimately, the Fed unveiled an enhanced, seven-day dollar swap late on Sunday to try and ease funding stress in global markets. Although the use of this facility has been limited, the rush to add liquidity into the monetary system is "the most overt sign" of financial stress and a clear negative for the dollar.

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