Markets overview

GBP: Budget overshadowed by banking sector stress

As I analyze Chancellor Jeremy Hunt's budget that was delivered yesterday, I find that it has generally hit the right notes, considering the constraints he was given.

However, amidst all the stress in financial markets, it has been difficult to pick out any sterling reactions to the budget.

Instead, what caught my attention is the behaviour of the EUR/GBP, which seemed to decline yesterday due to the stress in the European banking sector. This situation reminded me of the weakness seen in EUR/GBP during the various Eurozone crises that occurred between 2012 and 2015.

Looking forward, it seems that the performance of the European banking sector will probably determine the EUR/GBP's performance over the near term. However, there is no the ECB that hiked 50bp today without causing any nervousness among banking stocks, the EUR/GBP can potentially push back above 0.8800. On the other hand, it appears that GBP/USD may be volatile and bounce around in a range of 1.20-1.22 until this banking sector crisis calms down.

Overall, as I evaluate the current financial landscape and Chancellor Hunt's recent budget, it seems that the European banking sector will play a pivotal role in determining the near-term trajectory of the EUR/GBP and, consequently, GBP/USD. While the budget seems to have been well-received, it's hard to say how it will fare amidst all the stress and uncertainty in the markets.

AUD: Tight labour market to keep the RBA on track?

Labour market data for February in Australia has surpassed the consensus expectations. As per the latest figures, the country has added 64.6k jobs, bringing the unemployment rate down from 3.7% to 3.5% - almost returning to a 50-year low. Additionally, underemployment has also reduced, coming back to near 15-year lows. This data clearly indicates that the decline in jobs that was observed in January was nothing more than a statistical quirk, and the labour market in Australia continues to remain tight.

The positive job data should also keep the RBA on track to hike rates in April. However, I find it puzzling that the Australian rates market is pricing in a 25bp rate cut by the RBA by July, which appears to be fuelled by growing investor concerns of systemic risk. In my opinion, the likelihood of RBA rate cuts in 2023 seems unlikely, given that global central banks are working to strengthen their financial systems against systemic risks. Moreover, Australia still has an inflation problem, and the labour market remains tight.

Despite these developments, the AUD is still expected to struggle against safe-haven currencies such as the JPY. However, it should outperform other commodity currencies like the NZD and CAD on the back of the strong labour market data. Overall, I am optimistic about Australia's economic prospects and believe that the positive labour market data is a promising sign for the country's financial future.

USD/JPY: Relying on the ECB?

It appears that USD/JPY is currently undergoing a test of important technical support levels in the 132.50/80 region. Unfortunately, re-emerging systemic risk concerns have prompted investors to once again consider the possibility of a Fed pause next week. This is despite the inflation and retail sales data indicating that the central bank should continue to raise rates. Few of my economist friends has noted that the control group retail sales data, which excludes auto dealers, building materials, gas stations, and food services & drinking place sales, remained strong. This suggests that while household consumption may be easing, it is not collapsing.

A critical event for USD/JPY today was the ECB meeting. The failure of the central bank to follow through on its hawkish rhetoric and hike rates would likely encourage investors to price in a pause by the FOMC next week. This would weigh on the USD. Although the USD is considered a safe-haven currency with yield appeal, this yield appeal is being eroded. At present, the market is pricing in about a 65% chance of a 25bp rate hike by the Fed next week.

It is worth noting that the US has some of its banking issues with its regional banks. However, the US Treasury and the Fed seem to have prevented these issues from becoming systemic risks. This leaves the USD's yield appeal intact, in my view. Overall, while the current situation may be causing some concern, I remain optimistic about the JPY’s prospects in the near future.