Fallout from Banking Crisis Impacts EURUSD and GBPUSD, Traders Await Central Bank Decisions

The U.S. dollar and Japanese yen, known as safe havens, received renewed support on Thursday due to growing concerns about a global banking crisis. This came after the recent collapse of Silicon Valley Bank in the U.S. spread contagion to Swiss bank Credit Suisse. In response, Credit Suisse announced that it would borrow up to $54 billion from the Swiss National Bank to restore investor confidence and shore up liquidity. Although this helped to reduce some of the heavy selling in Asia trade, market sentiment remained fragile amid worries that the banking stress unfolding in the U.S. and Europe could trigger a widespread systemic crisis. As a result, traders flocked to the greenback and yen, causing the two currencies to remain buoyant on Thursday.

Safe Havens U.S. Dollar and Japanese Yen Gain Renewed Support

The yen rose by over 0.5%, extending Wednesday's 0.6% gain and reaching 132.80 per dollar. The dollar, on the other hand, partially recovered some of its 2.15% surge from the previous session against the Swiss franc, but it remained near a one-week low. Although Credit Suisse now has the backing of the Swiss National Bank, which is known for its decisive actions during crises, investors remain cautious and emotional, making it difficult to determine when or if market sentiment will improve.

Credit Suisse has been grappling with a series of scandals that have damaged investor and client confidence. It is the latest casualty to be caught up in a crisis of confidence following the collapse of Silicon Valley Bank last week, which was followed two days later by the collapse of Signature Bank. These events prompted U.S. President Joe Biden to assure the public that the financial system was safe and resulted in emergency measures giving banks access to more funding. Given the high level of uncertainty and concerns about broader financial contagion, the dollar and yen will be the main beneficiaries due to the demand for safe havens.

Traders Await European Central Bank Decisions

Central banks are now grappling with the issue of how to navigate future rate hikes. Policymakers are in a bind, as they must determine how much further they can raise rates to combat inflation without triggering a financial sector shakeout. The European Central Bank (ECB) will hold a meeting later on Thursday to announce its interest rate decision. Ahead of the meeting, traders are scaling back their bets on a 50-basis-point rate hike, as the rout in Credit Suisse shares has raised concerns about the health of Europe's banks. There is a risk that the ECB will not follow through with its pre-commitment of a 50-basis-point hike due to financial stability concerns, and it will be a difficult decision for any major central bank to stick with its tightening path.

FX markets

EURUSD was experiencing significant losses on Thursday, rising by only 0.27% to $1.0607, after a 1.4% drop the previous day. GBPUSD gained 0.14% to $1.20725, having fallen nearly 0.9% on Wednesday. The U.S. dollar index, which tracks the dollar against a basket of currencies, was 0.16% lower at 104.48, reducing some of its 1% gain from the previous session. Investors are anxiously awaiting more information on the extent of the fallout, and rescue measures taken by authorities have so far done little to assuage heightened fears.

The Australian and New Zealand dollars, which are sensitive to risk, struggled to make headway on Thursday, having each fallen by close to 1% on Wednesday. AUDUSD rose by 0.23% to $0.6637, while NZDUSD fell by 0.42% to $0.6162, further pressured by weak economic data showing New Zealand's economy shrinking in the fourth quarter.

Gold Prices Fall from Six-Week High as Investors Take Profits

Gold prices, which surged to a six-week high on the back of the recent banking crisis, fell on Thursday as investors cashed in on profits. However, the yellow metal's safe-haven appeal remained high amidst the growing concerns over the state of global banking.

Investors had flocked to traditional safe havens, including gold, earlier this week, as the collapse of Silicon Valley Bank raised concerns about the stability of other banks in the U.S. and Europe. Gold prices rallied as a result, with many investors betting on it as a hedge against economic turmoil.

Nonetheless, the announcement of Credit Suisse's borrowing of $54 billion from the Swiss National Bank was enough to prompt investors to take profits in gold. The uncertainty over the U.S. monetary policy also played a role in the gold sell-off, as the dollar gained some strength.

Despite the recent dip, gold's safe-haven appeal remains robust in the current market. The continued uncertainty surrounding the global banking crisis and monetary policy is likely to keep gold prices buoyed in the foreseeable future.