Pound to Dollar rate up at 1.2540Euro to Dollar rate above 1.10USD lower amid concerns about a potential U.S. debt defaultBanking sector troubles not over yetFederal Reserve decision due later

By Charalampos Pissouros, Senior Investment Analyst at XM.com. An original version of this article can be found here. Image © Adobe Images.

The U.S. dollar weakened against most of its major peers on Tuesday and continued losing ground today amid concerns about a potential US debt default and a reminder that the troubles in the banking sector are not totally over yet.

U.S. Treasury Secretary Janet Yellen said that the government will most likely be unable to meet all its payment obligations by June 1 without raising the debt limit, while the collapse of First Republic Bank may have served as an alarming bell that the repercussions of the latest banking turmoil are yet to be fully felt by the economy.

On top of that, what could have also weighed on the greenback was data pointing to the fourth consecutive slowdown in US JOLTS job openings during the month of March.

With the data being released just a day ahead of the FOMC decision, investors may have become more assertive that the Fed may need to stop raising rates after today’s decision and consider cuts later this year.

Conditional upon a 25bps hike today, market participants are now pricing in nearly three quarter-point cuts by the end of 2023.

A 25bps hike today is unlikely to send shockwaves through financial markets as it is almost factored in.

So, if indeed this is what the Fed decides today, the spotlight will most likely turn to the accompanying statement and Fed Chair Powell’s press conference for hints about whether this was indeed the last push of the hike button, and on how officials are planning to move forward.

Given that underlying inflation remains sticky well above the Committee’s 2% objective and that inflation expectations have started to rebound, it seems a very unwise choice for Powell to dismiss the likelihood of future hikes.

For that same reason, he is also very likely to push back against rate-cut bets again.

However, the big question is whether the market will now believe him.

Yes, the dollar could strengthen should officials leave the door open to another hike in June.

However, calling for a bullish reversal may be premature.

If investors remain convinced that the Fed might be forced to start cutting rates later this year, any decision-related gains could be given back very soon, especially against the euro if the ECB continues to sing the same well-known hawkish song that calls for more hikes on Thursday.

Above: GBP/USD at four-hour intervals.

All three of Wall Street’s main indices slid more than 1% each yesterday, dragged by falls in regional bank stocks as investors remained concerned about the health of the banking sector and fearful about a potential US government shutdown.

The S&P 500 fell back below the key barrier of 4,150 and a hawkish Fed today could extend that slide.

Having said that though, the outlook of Wall Street is far from considered bearish.

With Fed cut bets staying firmly on the table and the bar for this earnings season being set so low that it barely leaves room for a gigantic disappointment, any downside extensions in the equity market could stay in check.

Investors’ nervousness was reflected in oil and gold prices as well, with WTI tumbling more than 5% yesterday and the precious metal rebounding to signal that its prevailing uptrend is not over yet.