Federal Reserve in Focus as Market Volatility Intensifies

Talking Points:

• The FOMC meeting headlines this week’s economic docket as investor focus remains on ongoing turmoil in the US banking sector.

• A dovish 25-basis point hike could be delivered by the Fed, paving the way for Gold to move higher and the US Dollar to lose ground against its peers.

The week ahead will likely be incredibly bumpy for financial markets as investors look ahead to the Federal Reserve’s monetary policy meeting and whether policymakers will continue to hike interest rates amid turmoil in the US banking sector. The collapse of Silicon Valley Bank earlier in the month had sent regional banking stocks tumbling lower and forced the Federal Reserve, Treasury and the Federal Deposit Insurance Corporation (FDIC) to announce emergency measures to prevent contagion. The move by the FDIC to insure deposits exceeding $250,000 and the implementation of the Federal Reserve’s Bank Term Funding Program have yet to assuage investors’ fears, with First Republic Bank – another San Francisco-based lender – staring down the barrel of a fate like that of SVB and Silvergate.

First Republic Shares Plunge Lower Following Collapse of Silicon Valley Bank

Even an injection of $30 billion in capital from a group of eleven prominent US banks, including the likes of JP Morgan Chase, Wells Fargo and Citigroup, was unable to prevent the stock from plummeting lower once again on Friday evening. Clearly, the market believes that a longer-term solution is needed to backstop these vulnerable regional lenders.  With that in mind, there is an outside chance that the Federal Reserve may err on the side of caution and pause its hiking cycle for the time being. This would seem to be the less likely scenario given inflation is still three times higher than the central bank’s mandated target. Nevertheless, the prospect of further collapses within the banking sector could open the door for a pivot from policymakers and act as a significant headwind to the US Dollar.

Economic Calendar

Shifting focus to the UK, the Bank of England is expected to hike its benchmark interest rate by 25 basis points to 4.25% – the highest levels in 15 years – as it continues to try and pull the inflation rate back towards its target of 2%. The annual inflation rate currently stands at an incredibly 10.1%, five times higher than what the central bank is aiming for. In local news, all eyes will be on the release of the RBA’s meeting minutes to determine how far away Governor Phillip Lowe and his colleagues are from reaching a peak Official Cash Rate (OCR). The Governor has hinted that a slowdown is just around the corner, however, recent jobs figures suggest that at least another hike is needed. Any mention of data dependency should solidify pricing of another 25-basis point hike and underpin the Aussie Dollar in the short-term.

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