The US dollar fails to hold on to gains as banking woes resurface (Daily analysis 26.04.2023)

First Republic, a struggling US regional lender, announced larger-than-anticipated deposit outflows in Q1 and dismal financial results. This raised further worries about the robustness of the US banking sector. As a consequence, risk-off emerged as a prevailing market theme. The EUR/USD exchange pair initially dropped below the 1.10 mark but has already clinched higher as risk appetite is buoyed after a promising start to the Big Tech earnings season.

With the release of quarterly results, it came to light that San Francisco-based regional bank First Republic reported a much stronger-than-expected deposit outflow, which accounted for 41%. As a result, concerns about the sector's health, its impact on the economy, and the Federal Reserve's future steps resurfaced. The market pricing suggests that the tightening cycle will be finalized next week with a final hike lifting rates to the 5-5.25% range. For the remainder of the year, almost 3 rate cuts (each amounting to 25 basis points) are now priced in.

Nonetheless, the recent newsflow from the US companies has been encouraging. Another smaller California-based bank, PacWest, reported that deposits had stopped flowing out as recently as March and in April performed nicely. Above all, investors reacted enthusiastically to the results of technology giants Alphabeat and Microsoft, released after hours. As a result, risk sentiment in Asia improved. In the long run, however, relative economic performance and monetary policy prospects indicate higher EUR/USD pair levels and a significantly weaker USD.