By Jessica Fleetham
A raft of central bank decisions, most notably by the U.S. Federal Reserve and the Bank of England, will provide the focus for foreign exchange and European bond markets next week, with investors scrutinizing how policymakers respond to recent banking sector troubles.
The Fed announces an interest-rate decision on Wednesday, followed on Thursday by the Bank of England, Norway's Norges Bank, the Swiss National Bank and Turkey's central bank.
The Fed is widely expected to raise interest rates by 25 basis points, with policymakers likely emboldened by the European Central Bank's decision this week to stick to its plan to raise rates by 50 basis points.
Global banking sector concerns should dissuade it from opting for a larger rate increase, however, and investors will pay attention to the future rate outlook.
Any signs that this could mark the final rate increase could spell bad news for the dollar.
"We are now back to the scenario where the Fed would hike by a final 25 basis points and pause," said Swissquote analyst Ipek Ozkardeskaya in a note.
For the dollar, this "probably means a further wind down of the early-year gains."
The recent collapse of Silicon Valley Bank in the U.S., followed by trouble at Swiss banking giant Credit Suisse, have caused jitters in financial markets and more signs of trouble could see the Fed leave rates on hold.
"If banking instability intensifies into the Fed meeting it would still decide to take a one-meeting time-out," Evercore ISI said in a note.
Banking sector concerns are expected to influence the thinking of Bank of England policymakers too and are dampening the market's expectations for U.K. interest rates.
Most analysts expect that the Bank of England will raise interest rates by 25 basis points to 4.25% on Thursday, but banking sector risks mean a greater chance of rates being left on hold.
Even if the BOE raises rates, sterling could still come under selling pressure as the central bank is "likely to still seem hesitant," said Commerzbank currency analyst You-Na Park-Heger in a note.
For gilts, analysts at TD Securities say a decision to hold rates or a 25 basis-point increase "with a strong pause signal" could lead to a strong rally in short-dated gilts, pushing yields lower.
Norges Bank is expected to raise interest rates by 25 basis points to 3.0% on Thursday, but it too is likely to be cautious.
"Whereas we stick to our base-case of another rate hike from Norges Bank next week, the recent market turmoil has significantly lowered rate expectations further down the road," Handelsbanken analyst Marius Gonsholt Hov said.
The Swiss National Bank looks most likely to raise interest rates by 25 basis points to 1.25%, though analysts see risks either of it opting for a bigger 50 basis-point increase due to inflation risks or of keeping rates steady due to the crisis surrounding Credit Suisse.
Beyond central bank decisions, provisional purchasing managers' surveys for the eurozone and the U.K. on Friday will give an indication of how economic activity is holding up amid high inflation and rising interest rates.
Investors will remain vigilant about the risks of higher global interest rates feeding through into further banking-sector or wider economic problems.
"The failure of SVB, and the more recent travails of Credit Suisse, have created widespread concern that something is about to break as a result of tighter monetary policy," said AJ Bell head of investment analysis Laith Khalaf in a note.
Write to Jessica Fleetham at jessica.fleetham@wsj.com
Additional reporting by Renae Dyer, Miriam Mukuru and Dominic Chopping
(END) Dow Jones Newswires
03-17-23 0942ET
