European Markets Brace for Slow Growth Amidst Banking Crisis

The European stock markets are expected to open lower on Friday, as concerns mount over slowing economic growth and the ongoing banking crisis. The DAX futures contract in Germany traded 0.4% lower, the FTSE 100 futures contract in the U.K. fell 0.6%, while CAC 40 futures in France traded largely unchanged. The European banking sector has shown some signs of stability this week, but selling by smaller regional U.S. banks resumed on Thursday, even as Treasury Secretary Janet Yellen sought to reassure investors.

Cautious sentiment continues to pressure the market outlook

Central banks are continuing their clampdown on inflation, which is likely to weigh on economic activity. The Bank of England and the Swiss National Bank both hiked interest rates again on Thursday, following last week's European Central Bank hike. Citigroup has cut its target for the Stoxx 600 index, expecting the benchmark to end the year at 445 points - around its current level - down from a 475-point forecast issued just last month. Citi expects company earnings to contract by 5% to 10% this year.

Amid the banking crisis, the strains are showing as borrowing at the Federal Reserve's discount window was a hefty $110.2 billion as of Wednesday. Additionally, lending from the Fed's new Bank Term Funding Program ballooned to $53.7 billion, while loans to foreign central banks surged to $60 billion. As a result, investors are shifting their attention to recession risks and deteriorating fundamentals. The European Central Bank's President Christine Lagarde is set to speak at the European Council meeting later in the session, while European PMIs will be studied carefully as they could have a bearing on monetary policy and markets.

The U.K. retail sales rose a stronger-than-expected 1.2% in February, an improvement from the revised 0.9% rise seen in January, which translated into a drop of 3.5% on an annual basis. Despite this positive news, the overall sentiment in Europe remains cautious due to the ongoing banking crisis and concerns over slowing economic growth.

USD/CAD short-term impetus

The Federal Reserve's recent interest rate hike failed to boost the Greenback, as the central bank sounded cautious about the economic outlook following the recent banking sector turmoil. The Fed's lowered forecast for real GDP growth projections for 2023 and 2024 has depressed US Treasury bond yields and the USD, adding to the pressure on the USD.

On the other hand, the positive sentiment in the equity markets is another factor weighing on the safe-haven USD. The Bank of Canada is expected to hold off on raising interest rates any further, especially after the softer-than-expected Canadian consumer inflation released earlier this week. This could lend support to the USD/CAD pair, though investors are cautious ahead of important macro data from the US and Canada due later in the day.

Technically, the USD/CAD pair has been trading within a familiar range since the beginning of the week, indicating indecision among traders over the near-term trajectory. The mixed fundamental backdrop further warrants caution before placing aggressive directional bets.

Investors are also closely watching the US economic docket for cues, including Durable Goods Orders and flash PMI prints. The US bond yields and the broader risk sentiment will also influence the USD demand. Meanwhile, Canadian monthly Retail Sales figures and Oil price dynamics could provide fresh impetus to the USD/CAD pair and create short-term opportunities on the last day of the week.