'Safe Haven' Pound Sterling Rallies against Euro, Dollar and Others as U.S. Banking Concerns Emerge Again

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Pound Sterling is in demand on a combination of renewed U.S. banking fears and expectations that the European Central Bank was nearing a peak in its interest rate hiking cycle, which in turn implied a potential peak in the Euro.

Global markets were in the red amidst news of fresh turmoil in a number of regional lenders.

"The U.S. bank crisis returns to haunt investors," says Chris Beauchamp, chief market analyst at IG. "Other U.S. banks are coming under heavy pressure, threatening once again to upend the stability of the US financial system less than a day after Jerome Powell pronounced it healthy."

The Pound has shown itself to be a beneficiary in times of U.S. and European banking sector stress, with analysts saying the UK's stable and well-funded banking sector insulates UK assets like stocks and the Pound.

"Far larger banking sectors in the U.S. and Europe may be helping the pound in this environment with investors more confident of the UK banking sector avoiding any nasty surprises than in the U.S. or the euro-zone," says Derek Halpenny, Head of Research for Global Markets EMEA at MUFG Bank.

The FT reports Western Alliance is exploring strategic options including a potential sale of all or part of its business. PacWest shares meanwhile plummeted more than 40% on Thursday morning, a day after it said it had been approached by potential partners and investors and was reviewing strategic options.

Above: The U.S. bank index (top) and EUR/GBP. The SVB collapse on March 10 saw fears rise over the subsequent days and the Pound strengthened.

The Pound to Dollar exchange rate (GBPUSD) reached its highest level in a year on Friday at 1.2615 amidst an ongoing uptrend that has been boosted by a belief the Federal Reserve has ended its rate hiking cycle while the Bank of England can hike again next week.

That the banking crisis is centred on the U.S. meanwhile suggests the Fed might have to cut rates well ahead of its central banking peers.

The Pound to Euro exchange rate has rallied back above 1.1425 amidst the broader bid under Sterling with added impetus coming from signs the European Central Bank (ECB) might be nearing the end of its rate hiking cycle.

The ECB raised interest rates by 25 basis points and said it would hike again if inflation data warranted.

Heading into the ECB decision market positioning data showed investors held their biggest 'long' position on the Euro since late 2020.

This left the Euro at risk of a setback if the ECB disappointed with a softer-than-expected decision. In fact, the bar is now set quite high for the ECB to push its hawkish credentials even further, something that would be required to sustain ongoing Euro strength.

"The European Central Bank has hiked its policy interest rate by 25bp and seems to have entered the final stage of its current tightening cycle," says Carsten Brzeski, Global Head of Macro at ING Bank.

"In the current, very complicated macro environment with the lagged impact from previous hikes, banking turmoil, and subdued growth but still sticky inflation, the ECB will tread more carefully," he adds.

It looks like the peak is in for ECB rate hike expectations, raising the prospect that the near-term peak for Euro exchange rates has also been reached.