On Wednesday, the US stock market experienced a significant downturn as investors were hit with a double dose of stress. Treasury Secretary Janet Yellen’s remarks on the state of the banking system rattled bank shares, while Federal Reserve Chairman Jerome Powell dashed hopes for rate cuts shortly. This sent the financial sector into a tailspin and weighed on the broader stock indexes.
During her testimony to lawmakers, Yellen stated that the government is not considering providing “blanket” deposit insurance to stabilize the banking system. This sent financial shares plummeting and caused broader stock indexes to suffer as a result. Investors were already on edge due to inflation concerns and rising interest rates, and Yellen’s remarks fueled the fire.
Adding to investors’ concerns, Powell also stated that he is prepared to keep tightening until inflation shows signs of cooling. The market had initially risen as the Fed delivered the expected 25 basis-point hikes and kept its year-end rate projection intact. However, Powell’s comments caused the market to give up its gains and turn negative.
In a broad-based selloff, the S&P 500 erased a rally that had approached 1% and finished the day with a 1.7% slide. All eleven sectors of the S&P 500 stayed in negative territory, indicating a pessimistic market mood. It’s worth noting that all 22 stocks in the KBW Bank Index retreated, with the measure of US financial heavyweights down almost 5%.
Main Pairs Movement
On Wednesday, the US Dollar experienced a significant drop to its lowest level in almost seven weeks after the Federal Reserve raised interest rates as expected. However, a change in the bank’s language indicated a potential policy shift that could lead to the bank reaching its terminal rate sooner than expected. As a result, the DXY index fell by almost 0.8% and closed at a level of 102.54.
The EURUSD pair surged by 0.82% on a daily basis after the President of the European Central Bank, Christine Lagarde, mentioned that underlying inflation dynamics remain strong and that they have not committed to raising interest rates further or finished hiking. The pair rallied dramatically following the Fed’s interest rate decision and closed at a level of 1.0856 on Wednesday. Meanwhile, the GBPUSD pair earned a 0.42% daily gain and closed at a level of 1.2262.
Gold also experienced a significant gain of 1.55% on Wednesday as US Treasury Secretary Janet Yellen’s comments suggested no out-of-the-line support for United States banks, which seemed to weigh on Treasury bond yields and propel the XAU/USD price. The yellow metal surged with a 1.26% daily gain and closed at the $1970 mark for the day.
Technical Analysis
EURUSD (4-Hour Chart)
On Wednesday, the EUR/USD pair continued to rise for the fifth consecutive session, nearing the 1.0800 area prior to the US session and posting a daily gain of 0.18%. This rise was mainly due to the weaker US Dollar, as US Treasury bond yields experienced a sharp decline. The markets are expecting the Federal Reserve to announce a 0.25% hike in the Fed Funds Rate to a target range of 4.75%-5.00% during the meeting. However, traders believe that the Fed cannot be as aggressive as it would like to be due to the international banking crisis triggered by the collapse of Silicon Valley Bank. In the Eurozone, the European Central Bank President, Christine Lagarde, has pledged to bring down inflation, as there is no clear evidence that underlying inflation is trending downwards.
From a technical standpoint, the RSI indicator stands at 80, indicating that the bulls are in control, as the RSI is entering the overbought zone. The price has maintained its upward momentum and moved alongside the upper Bollinger Band, suggesting that the upside trend may continue. Overall, we expect the market to remain bullish as the pair tests the 1.0903 resistance level. However, there may be a downward correction in the near term before the pair climbs higher.
Resistance: 1.0903, 1.0962
Support: 1.0798, 1.0735
XAUUSD (4-Hour Chart)
On Wednesday, XAUUSD stabilized around $1,940 ahead of the Federal Reserve’s rate-setting meeting, while Wall Street’s main indexes struggled for direction due to uncertainty in the banking sector. Traders have lowered their expectations for the interest rate hike to 25 basis points, citing concerns about liquidity in the banking sector and the Fed’s aggressive monetary tightening over the past year as reasons for the crisis. At the time of writing, the price of gold is trading at $1,948.70.
From a technical perspective, the 20-period moving average at $1,964 is currently providing support for the market. If this level is breached, we could see further weakness toward the recent range low at $1,933. On the other hand, if gold breaks above the recent retest of $1,985, it could gain further upside momentum to reach above the $2,000 level.
