Euro, dollar stable as bank tension eases

The US dollar and euro stabilised on Thursday as concerns over the banking sector subsided, with investors now focusing on inflation for hints on central banks’ next rate moves. Inflation data from German states, which is used to calculate a preliminary inflation figure for the euro zone’s largest economy, has started to come in. Consumer prices in the state of North Rhine Westphalia rose by 0.6% month-on-month in March, versus a 1% increase in February, and were up by 6.9% year-on-year, down from 8.5% previously. Meanwhile, data showed that Spain’s consumer prices rose by 3.3% year-on-year in March, which was slower than expected by analysts.

Francesco Pesole, FX strategist at ING, said, “With the European Central Bank explicitly data-dependent, this week’s inflation figures are set to be an important driver of the market’s rate expectations.” The ECB has increased its key deposit rate by 350 basis points to 3% since July as it seeks to control surging inflation. Currently, there are two 25 basis point rate hikes by the European Central Bank fully priced in by September, according to Refinitiv.

European Central Bank board member Isabel Schnabel stated that underlying inflation in the euro zone is proving stubborn and that the recent drop in energy costs may not bring it down as fast as some expect. The euro rose 0.07% to $1.0851 but was on track to end the month with a 2% gain. The dollar index, which measures the currency against six major peers, fell 0.1% to 102.52, as banking crisis concerns eased. It was on track to register a 2% decline for March due to market turmoil triggered by the collapse of US lender Silicon Valley Bank and culminated in the emergency takeover of Credit Suisse by rival UBS.

The dollar had been under pressure from the possibility that the Federal Reserve may have to relent in its fight against inflation and pause rate hikes. However, with no further signs of cracks in the financial sector and after steps taken by regulators, investor nerves have been calmed for now. Christopher Wong, a currency strategist at OCBC in Singapore, said, “The broader risk sentiment appears sustained as bank contagion concerns continued to fade.”

Data on US personal consumption expenditures due on Friday will provide additional clues on inflationary pressures in the world’s largest economy. Tina Teng, an analyst with CMC Markets, said, “With recession fears fading off, the market’s focus is now turning to the upcoming US PCE data later this week, which is seen as the Fed’s favourite inflation parameter.” Sentiment also improved after tech giant Alibaba announced plans on Tuesday to divide into six units, which investors viewed as a signal that Beijing’s regulatory crackdown on corporations is ending.

The Japanese yen strengthened 0.4% to 132.35 per dollar after dropping 1.5% on Wednesday. The currency has been volatile in the lead-up to the end of the Japanese fiscal year on Friday.