Forex Analysis & Reviews: 22.03.2023 - Janet Yellen's speech was to...

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22.03.2023 11:26 AM

Janet Yellen's speech was to prepare markets for the Fed's monetary policy decisions

Yesterday's speech by US Treasury Secretary Janet Yellen was clearly to prepare markets and investors who are now in disarray for the decision of the Fed.

Yellen said the US government could take further drastic actions similar to what it recently did to protect bank deposits and depositors. "Our intervention was necessary to protect the US banking system," she said. "Similar action may be warranted if smaller institutions face similar deposit withdrawals and liquidity problems. We will do everything we can to prevent the risk of further contagion," she added.

Earlier this month, US authorities adopted measures that would boost depositor confidence following the collapse of Silicon Valley Bank and Signature Bank. They guaranteed full repayment of insured and uninsured deposits of these two financial institutions. The Federal Reserve also launched a new lending support program and changed the rules of its emergency lending facility to help many banks cope with deposit outflows.

Yellen also mentioned that the current problems are markedly different from those seen during the global financial crisis in 2008. She said today's problem is unexplained raids on banks, and it is crucial that lenders have access to liquidity.

She also noted that the Fed was the key institution regulating the country's financial activities. Thus, the central bank's discount window and its new bank emergency financing program were working exactly as intended. "We believe the situation has improved and aggregate outflows from deposits have stabilized," Yellen said. "Officials will continue to monitor the situation", she added.

Yellen did not speculate on what regulatory changes might be needed if the situation in the banking sector worsened. She explained that their focus is on the current situation, thus, they will review the current regulatory and supervisory regimes and consider whether they are appropriate for the risks banks face today.

She also said that the government hoped to preserve the role of small and medium-sized banks within the larger financial system as they play an important role in the economy.

These statements clearly give an indication that the Fed will not be stopping its cycle of further interest rate hikes, not to mention the range could hit between 5.0% and 5.25%. Only then will the committee take a pause and watch things closely. A sharper rate hike is clearly not needed now as inflation continues to fall and the risk of exacerbating the banking sector crisis with it is only increasing.

In terms of the forex market, euro bulls still have all the chances to renew the March highs, but to do this they need to hold the quote above the support level of 1.0760. That will allow EUR/USD to rise beyond 1.0800 and head towards 1.0835 and 1.0875. In case of a decline, the pair will fall below 1.0760 and hit 1.0720 or 1.0690.

In GBP/USD, bulls are ready to keep storming the monthly highs, but they have to keep the quote above 1.2230 and breakthrough 1.2280. That will push the pair to 1.2330 and 1.2390. Should bears take control of 1.2230, a slide towards 1.2180 and 1.2130 is possible.

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*Disclaimer: The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.