Headlines

* Asian stocks nervous as dollar falls after Fed hike and possible pause

* US regional banks sink as PacWest weighs strategic options

* ECB to raise rates for a seventh time in inflation fight

* Gold goes bid and breaks out of recent trading range

FX: USD is falling for a third day this morning. Having topped out on Tuesday at 102.40, sellers look as though they will test strong support at 100.82. The 2-year yield fell sharply for a second day closing on its lows at 3.80% on the late PacWest news. But today has seen yields rise. The 10-year yield also dropped, towards January support at 3.23%. The Fed will now be driven by incoming data and meeting-by-meeting. But Powell said policymakers are much closer to the end of tightening or maybe even there. Credit conditions are continuing to tighten and more news of regional bank issues will add to slowing economic activity.

EUR extended gains with 1.1095 now in sight. As we said yesterday, a close above the early February high at 1.1032 would be positive for bulls, especially a weekly close. We still have the small matter of the ECB and NFP to come before then! GBP hit a fresh year-to-date high at 1.2590 before closing just below. Sterling is following external events this week with very little UK news. USD/JPY dropped 1.34% as it fell further away from its 200-day SMA. Initial support may come at the 50-day SMA at 134.40 and then 133.01. Falling Treasury yields have driven the fall with a small haven bid too on banking crisis jitters. AUD is trying to make a move back to its 200-day SMA at 0.6728 which has capped upside recently.  The CAD has been buffeted by falling oil prices and a mixed S&P 500. Support is at 1.3524, resistance at 1.3667.

Stocks: US equities closed lower after Fed Chair Powell cautioned that officials might not begin cutting rates soon. The statement hinted at a pause and Powell alluded to bank tightening lending standards and slowing the pace of lending. But he endeavoured to affirm that there is still work to do in bringing inflation back to target. The benchmark S&P 500 finished down 0.70%. The tech-heavy Nasdaq 100 lost 0.64%. The Dow closed down 0.80%. A drop in the US regional banking index late in the US session also hurt the indices. The energy sector underperformed again. It is down 6% in relative terms to the S&P 500 in the last week. Apple reports earnings after the close. It has already guided for a subdued report with a 5% revenue decline. Guidance, or at least data points on sales and specific products will be in focus. Capital returns are likely with a mooted $90bn in buyback and dividends reminding us of the size and power of AAPL.

Asian stocks were mixed after the Fed statement paved the way for a pause, but Powell pushed back against rate cuts. The Hang Seng was firmer as the mainland returned from the golden week holiday. Markets shrugged off the surprise contraction in Caixin Manufacturing PMI.

US equity futures are marginally in the green post-FOMC which had a dovish tweak to the statement but a caveat if data remains firm.  European equity futures are indicating a softer open (-0.1%). The cash markets closed up by 0.4%.

Gold spiked higher to $2067 early this morning and sharply above the recent top from mid-April at $2048. It has pulled back sharply to $2037. Continued instability around US regional banks underpins haven support for the precious metal. Falling yields too, will help bugs in their battle to close above $2048 for another attempt at $2070+.

Day Ahead – ECB set to be relatively hawkish

Consensus expects a 25bp rate hike with 50bps of more rises to come in the following two meetings, according to money markets. The latest inflation report was mixed this week but still showed core inflation way too elevated and sticky for policymakers. Despite banking sector concerns, the wider economy has also been holding up well with the service sector especially strong. The labour market remains tight and this is pressuring wages.

President Lagarde is expected to show off her inflation-fighting credentials. This comes even as the important Bank Lending Survey points to tightening credit standards. However, the doves will want to feature and may still push for future guidance only to come when the next staff economic projections are published at the June meeting. The bar is quite high for a hawkish surprise but a big contrast with last night’s Fed may push EUR/USD to fresh highs.

Chart of the Day – EUR/USD itching to go higher

Can markets price in more rate hikes from Lagarde and co? There are another 50bps of rate rises after this meeting and the outlook points to a much slower decline in rates through this year than the US. Of course, the Fed has a dual mandate of prices and employment while the ECB focuses on inflation only.

EUR/USD continues to consolidate with a weekly close needed above the February top at 1.1032 for more upside. Bullish indicators mean dips are being bought for a push towards 1.12. Strong support comes in around 1.1032 and 1.0942.