After the US Federal Reserve (Fed) and other central banks started offering daily currency swaps yesterday, the banking sector is still seen to be in turmoil, awaiting the interest rate announcement tomorrow.
As bank regulators rushed to restore confidence in the system, US and European markets mostly rose on Monday following the agreement for rival UBS Group AG to acquire Credit Suisse for $3.2 billion.
Investors are currently debating how much the financial sector’s turmoil will affect the economy and whether it will have an impact on the Fed’s interest rate decision tomorrow.
Markets are now forecasting a 70% probability of a rate increase of 25 basis points and a 30% chance of a pause by the US central bank.
Following the news that its competitor had been bailed out by UBS Group AG with the support of Swiss banking regulators in an effort to stabalize the financial system, shares of Credit Suisse Group fell 50% on Monday, while shares of UBS rose by 7.7%.
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Yet the financial industry is still a long way from stabilizing. Shares of the First Republic Bank fell 12.9% after S&P Global downgraded ratings.
The statement by the Fed and five other central banks that they would be expanding the offer of daily rather than weekly currency swaps, beginning yesterday and continuing through to April, also contributed to reducing tensions.
The Fed's decision to continue raising interest rates or to suspend them tomorrow is the only thing on the market's mind right now. The voting members of the Federal Open Market Committee (FOMC) will also release their most recent dot plot forecasts and economic outlooks in addition to interest rates.
Amid this scenario of uncertainty, the US Dollar continues to decline as it is being pushed down by the market interest rate crash and by anticipation that the Fed may decide to stop raising interest rates altogether.
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The USD/JPY pair lost nearly a full figure yesterday and is approaching the pivot level of 131.00.
Gold profited the most from the fall of the US Dollar, which is considered to have safe haven status, and managed to break through the barrier of $2,000 per ounce yesterday.
Sources: Bloomberg, Reuters
