Market sentiment is improving as concerns about banks subside

European and Asian markets went green on Tuesday as fears of a looming banking crisis subsided. US Regulatory Backed Purchase Transaction by First Citizens Bank bankrupt Silicon Valley Bank (SVB) improved global sentiment and cooled concerns about the banking sector. A renewed appetite for risk is likely to spur demand for global equities at the expense of safe haven assets. However, there is still some caution left after the recent turmoil in the markets, which may encourage investors to think twice before jumping on the risk train.

In commodities, gold is struggling to heal from Monday's decline as concerns over banks have diluted its appeal. This week, financial markets will focus on key inflation data from around the world, speeches from Fed officials and US Senate hearings on the Silicon Valley Bank. While some normality seems to be returning to the markets, it could easily be disrupted by negative news or data that will reignite fears not only about the banking sector but also about inflation.

Even more pain ahead of USD?

The last few weeks have not been kind to the dollar. Since early March, it has weakened against most G10 currencies due to rising expectations of a slowdown, and eventually a halt in interest rate hikes by Federal Reserve in the face of turmoil in the banking sector. Although fears of a full-blown crisis have subsided, markets still expect the Fed to cut its reference rates by 50 basis points by September. These expectations may be intensified by the upcoming hearings on the collapse of the Silicon Valley Bank and Friday's data on US inflation. If House and Senate hearings reveal fresh information about the chaos in the US banking sector, it could reignite fears of contagion,
which will ultimately hit the dollar amid rising expectations for a rate cut.

As for the inflation data, the Core PCE deflator for February is expected to show an inflation increase of 4,7%, which would be in line with January's annualized figure. Ultimately, a report that is in line with or below forecasts could fuel speculation about the Fed's next move, a rate cut. Although the path of least resistance for the dollar is starting to point south, hawkish comments from Fed officials may limit losses.

EUR / USD

This could be a wild week for EUR / USD pairs due to high-risk events and key inflation figures. The currency pair started the week in the black, lifting thanks to the weaker dollar. Given that the upcoming US Senate hearings and speeches by Fed officials mid-week will affect the dollar, this could translate into more volatility on the major currency pair. The situation may really get worse on Friday due to inflation data from the euro zone and the United States. Eurozone headline inflation is expected to fall sharply in March to 7,1% from 8,5% seen in the previous month. The ECB is focusing more on core readings though, so if those fall it could weaken the euro as investors wonder if EBC may stop interest rate hikes in the future.

Looking at the technical picture, EUR/USD has the potential to move higher towards 1,09 if a solid daily close above 1,08 can be achieved. However, if the bulls run out of steam, prices may slide towards 1,0750 and 1,0710.

Gold

Investors' appetite for gold it was suppressed by a combination of technical and fundamental forces. Having tripled above the $2000 psychological mark last week, the bears used this stubborn resistance to attack, with the easing of banking concerns further dulling the metal's appeal as a safe haven. While prices may fall in the short to medium term, the bulls are still the favorites in the longer term due to expectations of the Fed's interest rate cut in September.

Looking at the technical picture, gold appears to be experiencing a rebound after failing to break above the $2000 level. This could see the precious metal slide back towards $1955 and $1935 before the bulls re-enter the scene. If prices break below $1925, gold is likely to test the $1900 level.