Major Currencies Retreat Ahead of Fed's Likely Interest Rate Hike

On Wednesday, major currencies retreated against the US dollar in anticipation of the Federal Reserve's likely interest rate hike later in the day. While regional currencies suffered small losses, fears of a bank crisis appeared to be waning. The Fed is expected to hike interest rates by 25 basis points, given that inflation is still running well above the central bank's target rate. Markets have already priced in an over 80% chance that the bank will hike rates later in the day, according to Fed Funds futures prices. However, the dollar saw limited support on Wednesday, with the dollar index and dollar index futures falling slightly amid uncertainty over the Fed's outlook on monetary policy.

Treasury Yields Rise Ahead of Fed Announcement

Treasury yields rose on Wednesday but remained well below the highs hit earlier this year. While concerns over a banking crisis appear to have eased, further raises in interest rates could put more lenders at risk, which in turn could limit the Fed's ability to tighten policy. Nevertheless, prior to the banking crisis, Chair Jerome Powell had espoused a hawkish stance for the central bank amid high inflation and strength in the labour market. The central bank had also rolled out emergency liquidity measures to stem a broader crisis, which largely undermined its monetary tightening over the past year. The Fed will announce its decision on interest rates by 14:00 ET (18:00 GMT), followed by a press conference by Chair Jerome Powell an hour later. Still, rising interest rates bode poorly for Asian currencies, as the gap between risky and low-risk debt narrows. Regional units were hit hard by the Fed's rate hikes through 2022.

UK Inflation Accelerates Again Amid Rising Budget Deficit

Sterling moved lower on Wednesday after data showed Britain recorded a budget deficit of 16.68 billion pounds ($20.4 billion) in February, far above expectations in a Reuters poll. Inflation accelerated again in the UK in February, disappointing hopes for a slowdown and increasing pressure on the Bank of England to keep raising interest rates despite the growing risk of financial instability. The consumer price index rose 1.1% on the month, well above the 0.6% rise expected, taking the headline annual rate back up to 10.4% from 10.1%. Analysts had expected it to fall below 10% for the first time since August. The numbers come a day before the Bank of England is set to announce its latest policy decisions, greatly increasing the risk of another increase in interest rates.

Gold Prices Stabilize as Safe Haven Demand Weakens

Gold prices moved in a tight range on Wednesday, stabilizing after a sharp drop in the prior session as markets hunker down ahead of a Federal Reserve interest rate decision. Bullion prices were nursing sharp losses from the prior session, as government intervention helped calm fears over a looming crisis in the US and European banking system. This in turn saw markets dump gold at one-year highs, given that the yellow metal's recent rally was largely driven by safe-haven demand. Easing fears of a bank crisis also saw markets begin pricing in a greater possibility that the Fed will remain unwavering in its fight against inflation. The prospect of rising interest rates bodes poorly for zero-yield assets like gold.