Cracked walls – Markets hope for hike pause to avoid systemic risk

USD/CHF consolidates ahead of Fed response

The US dollar whipsaws as traders reprice rate hikes amid financial instability. Policy guidance has so far been data-dependent, not so much with banking headlines lately, which would make the outcome of the Fed meeting anyone's guess. As the drama unfolds during the central bank's blackout period, suspense is building up along with volatility as nobody wants to come out on the wrong side on Wednesday. Will Powell & Co back down? A dovish pivot may soothe the market but a stubbornly hawkish stance would fuel the flight to quality and pop the greenback above 0.9430. 0.9050 is the recent bottom.

GBP/USD steadies as BoE may deliver modest hike

The pound consolidates as the Bank of England weighs its rate hike options. Wage growth in the UK slowed down in the three months to January. The BoE is expected to lift its interest rates by 25 basis points to 4.25% next week. While worries about the banking sector raise bets of a pause in monetary normalisation, the market hopes that the government’s fiscal policy would ease the inflationary pressure, lessening the burden on the central bank. Finance minister Jeremy Hunt’s policies to address the tightness in the labour market may temper the hawks’ zeal. The pair is still going sideways between 1.1800 and 1.2450.

XAU/USD recovers on safe-haven demand

Gold rallies as traders seek to hedge against economic uncertainties. Demand for the safe haven metal has surged over the past dramatic week as market participants fear a liquidity crunch in the financial system. Most are hoping that the Fed would take their foot off the gas. However, the ECB has pressed ahead with another 50 bp hike despite the banking crisis, raising concerns that its US counterpart would stay in tandem. Unfazed hawkishness would signal that policymakers are willing to throw more bankers under the bus and that would contribute to gold's strength. The price is rising towards 1995 with 1895 as the closest support.

S&P 500 struggles as market hopes for Fed rescue

The S&P 500 fell as investors await the Fed’s response to the financial turmoil. The cost of taming inflation seems to be breaking the system. The collapse of two large regional US banks and Credit Suisse’s distress call fanned fears of a broader contagion and might be the trigger to the much-talked-about recession. The Fed’s mission has shifted to restoring confidence in the banking system, probably by signalling a halt to its relentless tightening. Market participants are split between a modest quarter-point hike and a pause, and hopeful of rate cuts later on. If so, the index could climb back to 4080 with 3780 as the closest support.