CPI in Focus, Safe Haven Alternatives Soar as Banking Sector Struggles

High volatility continues for a second day after the Federal Government had to step into the banking sector. The SVB collapse is the first time in over a decade that one of the major US banks failed after large withdrawals. The US Dollar Index ended the day slightly lower than the open market. However, the price had renewed its recent lows throughout the day. This morning the US Dollar Index has climbed a decent 0.26%.

The Euro has also struggled throughout the past 24 hours, declining against the Pound, Yen, and Franc. The real winner on Monday was clearly the safe haven alternatives to the US Dollar. Bonds experienced their sharpest climb since the late 1980s, and Gold increased by 2.50%. The Swiss Franc, which many also consider a safe haven asset, increased dramatically in value. 

Analysts, including myself, now believe the Consumer Price Index, scheduled for this afternoon, will play a less important role for the Federal Reserve. The central bank would be willing to allow inflation above their target while confidence in the banking sector returns. Nonetheless, it can still create a lot of volatility and drive prices. 

If inflation is lower than expected, it could be a stepping stone for the Fed to take a more dovish stance. This would give investors a clear view of the monetary policy for 2-3 months. However, if inflation is higher than expected, the market will be more challenging to predict due to conflicting elements. 

GBP/USD

The Pound has formed five consecutive bullish days against the Dollar but is declining this morning. Despite this morning’s decline, the price action over the past week still shows an upward trend. To obtain stronger signals of a downward price movement, investors will look for the exchange rate to decline below 1.2140 and 1.2045.

Investors still morning will be monitoring technical analysis to assist in placing their trades, but the focus will likely be on fundamental news. The price this morning has so far been influenced by the Dollar’s appreciation as the CPI announcement approaches. However, the Pound has also received positive news this morning about the employment sector. The UK Unemployment Claims declined by 11,200, whereas the market expected the figure to read +12,000. The UK’s Unemployment Rate also unexpectedly remains at 3.7%.

The US’s Inflation Rate is expected to experience a decent decline from 6.4% to 6.0%. However, economists expect the monthly Consumer Price Index to remain at 0.4%. Markets also expect a similar reading for the Core Consumer Price Index. As mentioned above, if the monthly reading is lower than 0.4%, most investors will expect a less strict stance by the Fed. 

As mentioned during yesterday’s market analysis, most investment banks have revised their interest rate expectations. Goldman Sachs expects the Federal Reserve to keep the Federal Fund Rate unchanged next month. This would be the first time since January 2022. Other economists from various banks have taken a similar approach, while others expect a 25 basis point hike. 

Bloomberg also reports that the Central Bank may even look to cut interest rates before the summer. However, for this to materialize, the federal fund rate would need to be higher than the inflation rate. If we look at the five times over the past 30 years that the Fed has cut after a hike, the inflation rate was lower than the interest rate. Therefore inflation will need to drop closer to 5% for cuts to occur. Investors will be fixed on the Chairmen's next press conference for concrete answers. 

Lastly, investors should also note that after the CPI announcement, investors will start to plan for tomorrow’s economic events. Investors will be concentrated mainly on the UK’s annual budget, the US’s PPI, and Retail sales. 

XAU/USD

The price of Gold over the past three trading days has increased by 5.5% and rose to its highest price since February 2nd. The price this morning has slightly declined, which is understandable considering the large gains over the past 3 trading days and the slight rise in the US Dollar this morning. It is important that investors also monitor the Dollar’s price action while trading Gold due to the strong correlation. 

Investors' uncertainty significantly declined after the failure of 2 US banks in a short space of time. The 2 banks in reference are SVB and Signature Bank, but investors are fearful more banks may follow. The Federal Government and, most likely, to the Federal Reserve will act strongly to try and ensure traders this is not the case. Nonetheless, so far, we can see investors are redirecting their capital to proven safe haven assets. 

The US Treasury has released an emergency support program to ensure banks do not face liquidity problems. During the President's speech yesterday, he confirmed he would ask Congress to tighten regulation to avoid further failures in the banking system. The president also noted that the failures are unrelated to a “credit crunch” similar to the 2007-2008 crisis. 

Today’s CPI announcement and the Dollar’s reaction will also influence the price of Gold. However, investors will also wait for the US Commodity Futures Commission to confirm the number of speculated contracts and the ratio between long and short positions.

Summary:

• The US Dollar slightly climbs this morning after significant declines during yesterday’s trading sessions. 
• The market is contemplating whether the Federal Reserve will hike 0.25% or keep interest rates unchanged for the first time since January 2022.
• Most investment banks and economists believe the Federal Reserve may be forced to cut the rate before or during the summer months. 
• Gold again increases in value as investors redirect their capital regardless of the federal government’s emergency program. 
• The UK employment sector remains strong with less individuals claiming unemployment benefits and the unemployment rate remaining unchanged.