"A rescue package for First Republic Bank calmed nerves about spreading bank runs" - Commonwealth Bank of Australia.

Image © Adobe Image

The Pound, Euro and other currencies had almost fully reversed their earlier losses against the Dollar by the final session of the week as market concerns about the stability of banking sectors in the U.S. and Europe appeared to wane, prompting a relief rally in some assets going into the weekend.

Sterling traded back above 1.21 against the Dollar on Friday after climbing from 1.20 in the mid-week session after government and private sector actions appeared to mitigate market concerns about the stability of small U.S. banks and one large European lender.

Friday's buoyant performance from Sterling came as European stock markets looked to build on Thursday's recovery, which was given legs by reports of a significant syndicated financing having been arranged for a small U.S. lender that had been a hot topic for financial markets.

"A rescue package for First Republic Bank calmed nerves about spreading bank runs. A group of the US’s largest banks will deposit $US30bn for at least 120 days," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

Thursday's financing came from firms including Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, PNC Bank, State Street, Truist, and U.S. Bank and appeared intended to bolster public confidence in First Republic Bank.

Above: GBP/USD shown at 2-hour intervals alongside GBP/EUR, EUR/USD and AUD/USD.

"This show of support by a group of large banks is most welcome, and demonstrates the resilience of the banking system," the U.S. Treasury, Federal Reserve and Federal Deposit Insurance Corporation (FDIC) say in a joint statement on Thursday.

This was after concerns about the ready availability of customer deposits led to 'bank run' type behaviour as well as the failure of Silicon Valley Bank and others last week, prompting the U.S. Treasury, Fed and FDIC to step in with an offer of support for any banks struggling to meet demand for deposit withdrawals.

The Pound and others also benefited after Credit Suisse said Thursday that it would make use of a short-term funding facility at the Swiss National Bank (SNB) after being assured previously of support if it becomes necessary.

The Swiss lender made use of a facility enabling it to borrow around CHF 50BN from the SNB and also said it had bought back around $3 billion of its own debt from a bond market that was a heavy seller until midweek.

"Overall, we think bank solvency fears are overdone, and most banks retain strong liquidity positions. As such, depositors in the vast majority of institutions remain well-protected," says Mark Haefele, chief investment officer at UBS Global Wealth Management.

Above: GBP/USD shown at daily intervals with selected moving averages and alongside GBP/EUR. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

"However, headwinds to profitability are mounting. Some banks will be forced to further increase deposit rates to reduce the risk of deposit outflows, and wholesale lenders may also demand higher rates of return, increasing funding costs," Haefele says.

Prior to all of this, heavy selling of Credit Suisse shares led to a rout in the broader European banking sector entailing double-digit percentage losses for some names, with knock-on effects on currencies.

Volatility in stock markets was a prominent influence on Sterling this week but the outlook for it hinges in no small part on next Wednesday's inflation figures and Thursday's Bank of England (BoE) interest rate decision.

"Markets probably deem the UK banking sector less exposed than the eurozone one and are punishing the euro much more than the pound when risks to the Swiss lender escalate," says Francesco Pesole, an FX strategist at ING.

"The ECB hike may have slightly increased the chances of the Bank of England delivering a 25bp hike next week. Our base case is a hike, although it’s admittedly a close call as we acknowledge it will depend on financial market developments and CPI numbers," Pesole writes in Friday market commentary.