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Euro exchange rates fell sharply on Wednesday amidst fresh fears for the Eurozone's banking system, which could mean the European Central Bank shies away from delivering a 50 basis point rate hike on Thursday.

It was reported the trade in shares of Credit Suisse, Societe Generale and several Italian bank stocks were halted from trade due to the steep losses.

The declines raise fears the rapid pace of increase in global interest rates is harming the Eurozone's financial sector.

BNP Paribas was down 11.5%, Societe Generale was down 11.1%, Commerzbank was down 9.5% and Deutsche Bank was down 8.1%.

"Investors were panicking. Bloodbath, if you will," says Fawad Razaqzada, analyst at City Index. "This comes fresh on the heels of a broader industry selloff following the collapse of Silicon Valley Bank. Concerns over another 2008-style financial crises have intensified."

The Pound to Euro exchange rate rallied two-thirds of a per cent to 1.1390 on the news, and the Euro to Dollar exchange rate fell by 1.20% to hit 1.0604.

The fall in the Euro tracked a collapse in short-term Eurozone bond yields. The below chart shows the rally in GBP/EUR in response to the sharp decline in Italian two-year bond yields:

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The fall in bond yields means investors are rapidly lowering their expectations for future ECB rate hikes as the central bank would risk creating damage to the Eurosystem if it pursued a path of rapid hikes.

Sterling's stability relative to the Euro meanwhile suggests investors have no similar fears for UK banking sector stocks.

Major UK banking shares were lower in the region of 4%, which was far less severe than Eurozone names.

This is highly likely a reflection of the Bank of England's stubborn refusal to hike UK interest rates as far and as fast as investors have been expecting over the course of the past year.

The developments mean the ECB will likely have to reconsider its approach to the rate hiking cycle at Thursday's policy decision.

"In FX, the euro and Swiss franc both dropped sharply. More losses could be on the way if investor concerns over Credit Suisse is not addressed by authorities quickly. If the bank fails, this could have major implications for other European banks that have exposure to the beleaguered Swiss lender," says Razaqzada.

"Fast-moving financial markets have today seen attention switch from the (ongoing) banking crisis in the US towards Europe. Credit Suisse shares have fallen 23% and the Eurostoxx Banks Index is off 8%. Stress in money markets is moving back to Monday’s levels and the euro is softening," says Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING.

Credit Suisse is the centre of focus with a long-running decline in share price value accelerating following the release of full-year 2022 results on Tuesday that revealed a number of risk management issues.

But on Wednesday the bank's Saudi investors said they would not provide further funding.

"News this morning of a major Credit Suisse shareholder ruling out a capital injection in the ailing Swiss bank not only rekindled a still lingering fire, it fanned it into a roaring blaze," says Mathias Van der Jeugt, analyst at KBC Markets.