Whilst our March forecasts have broadly panned out, ultimately finishing the month more or less where we had anticipated, it was the driving force behind these moves that came as a surprise to us. Like many forecasters, we had been looking to other parts of the financial system as a source of risk and had not been looking all that closely at US regional banks prior to the beginning of March, so the collapse of SVB and resultant wave of banking concerns was unexpected. By offsetting stronger than expected data across many economies, these developments prompted fixed income markets to price in a more conservative path forward for interest rates like we had expected, especially for the Fed. This resulted in our central call for most major FX pairs materialising, just via a different path than the one we had initially projected. With the actions of various authorities containing any further fallout from the previous financial stability risks, our base case looking forward is that a more systematic rupture in the banking system is improbable, but continual risks towards financial stability are likely to appear. This drives our call for moderate dollar weakness over coming months, with the relatively greater exposure of the US banking system placing a restraint on Fed policy tightening. Combined with improving growth and interest rate conditions elsewhere, we see a stage that is set for greenback underperformance over coming months.
You can read our April 2023 FX Forecasts report here:
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst
María Marcos, FX Market Analyst
Nick Rees, FX Market Analyst