EUR/USD Weekly Forecast: Between a rock and a hard place, the Fed will decide on monetary policy

U.S. economy
  • Even though the economy was in trouble, the European Central Bank went ahead with the planned 50 bps hike.
  • The decision will be made public next Wednesday by the United States Federal Reserve.
  • EUR/USD stayed in a steady state for a fourth week in a row, waiting for new clues about the banking sector

This week, there were a lot of bumps on the financial markets because people were worried about the health of the banking sector. The EUR/USD pair traded between 1.0515 and 1.0759 before settling above 1.0600, which was just a little bit lower than where it started on Monday.

A  banking catastrophe in the makes

After US President Joe Biden stepped in to save depositors of Silicon Valley Bank (SVB) and Signature Bank to stop a bigger financial crisis, market players tried to stay optimistic at the start of the week. After SVB failed, American regulators closed SB on March 12 so that the banking crisis wouldn’t get worse.

The situation seemed to be under control, but speculation slowed down so that future monetary policies could be rethought. The US Federal Reserve and the changes made to monetary policy because of the coronavirus pandemic could help explain some of the US banking crisis. In the first year, there was a lot of liquidity, but starting in early 2022, there was a lot of tightening. The US interest rate benchmark went from 0% to 5% in less than a year. As a result of the Fed’s policies, the value of government bonds went down and the cost of borrowing went up, which hurt banks’ capitals.

But the market mood turned bad again in the middle of the week when shares of Credit Suisse Group AG fell more than 30% before trading was stopped. Fears of contagion caused the European bank sector to collapse, and it wasn’t until late Wednesday that the Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA) said Credit Suisse had met the capital requirements for banks and that they would provide liquidity if needed. Credit Suisse fell after Saudi National Bank Chairman Ammar Al Khudairy, the company’s biggest shareholder, said that he would not help the company with money.

Last but not least, on Thursday, several big US banks put $30 billion into First Republic Bank (FRC.N), which was also having trouble with liquidity because people were rushing to take their money out of the bank.

The situation isn’t over yet, and the markets will hear more about capital problems in the days to come.

European Central Bank delivered

Even though there was trouble in the banking system, the European Central Bank (ECB) raised its benchmark interest rates by 50 basis points (bps). In the statement that went with the report, policymakers said they expected inflation to average 4.6% in 2023 and growth to speed up to 1.6% in both 2024 and 2025. In the statement, there was a line that said, “The new macroeconomic projections from the ECB staff were finished in early March, before the recent tensions on the financial markets.”

After the ECB’s decision, President Christine Lagarde gave a speech in which she said that European banks are strong. She also said that policymakers are keeping a close eye on “current market tensions” and are ready to act as needed to keep prices stable and keep the financial system stable in the euro area.
Lagarde also said that there was no trade-off between price stability and financial stability after rates were raised, despite the turmoil in the banking sector. She said this to make it clear that the central bank’s main goal is still to keep prices stable. As investors tried to figure out what she meant by what she said, the EUR/USD pair had a hard time going anywhere. After the dust settled, it stayed around the 1.0600 level.

The fight to stay hopeful started up again on Friday, but it failed miserably after SVB officially declared bankruptcy and First Republic shares fell sharply, dragging stock markets down.

Federal Reserve coming up next

The Federal Reserve of the United States will make a decision about monetary policy next Wednesday. Before the banking crisis happened, the financial markets were preparing for a 50 bps rate hike. This was because Chair Jerome Powell had given hawkish testimony before the crisis. At the time this was written, however, the CME FedWatch Tool showed that the odds of 25 bps were 76%, while the chances of 50 bps were no longer possible. Will the Fed stay aggressive or become more careful to keep the chaos from getting worse?

It could be a lose-lose situation for the US central bank, since a 50-bps hike would put more pressure on financial institutions that are already struggling. But if they make a more quiet move, they will show the markets that they are worried. This could make the crisis worse and give them more time to deal with high inflationary pressures.
In addition to the Fed’s decision, the macroeconomic calendar will include the first estimates of the March S&P Global PMIs, which measure the health of businesses in the major economies. The US will also report February Durable Goods Orders, which are expected to be up 0.3% MoM.

EUR/USD technical outlook

Even though trading was very volatile, EUR/USD stayed within Fibonacci levels for the fourth week in a row. At 1.0515, which is the 50% retracement of the 2022-year drop, the weekly low was set, while sellers rushed in at 1.0745, which is the 61.8% retracement of the same drop. Right now, the pair trades in the middle of these levels, and one would have to give up in order to see a clearer direction of movement.

The weekly chart shows that the retracement has lost steam, and that technical indicators have stopped moving and are now in a positive range. The pair is also ending the week above a bullish 20 Simple Moving Average, which is currently providing dynamic support at around 1.0590. On the other hand, the 100 SMA starts to move down well above the current level and gets farther away from the 200 SMA.

The daily chart also shows that the pair is still trying to figure out where it wants to go. The Momentum indicator moves back and forth around its middle line, and the RSI moves north but stays around 48. At 1.0560, a bullish 100 SMA provides support, but the pair is having trouble getting over a slightly bearish 20 SMA right now. There is no clear direction, and people on the market can only hope that the Fed’s announcement will break the tie.

The first level of support is around 1.0590, and the Fibonacci level mentioned above is at 1.0515. If this level is broken, the price should drop more sharply, at first to the 1.0400 area. Bears will probably keep protecting the area between 1.0740 and 1.0750, even though big stops are likely to be building just above the area. If those are set off, the 1.0820/40 area can be seen.

EUR/USD sentiment poll

The FXStreet Forecast Poll shows that investors are not too worried about the EUR/USD pair. From a weekly and a monthly point of view, the pair is expected to stay around its current level, with no big difference between bulls and bears. In the bigger picture, bulls are in charge because 57% of the experts polled bet on higher goals, with the pair expected to reach an average of 1.0804.

The Overview chart shows that the weekly and monthly moving averages are both flat, but the longer ones are getting stronger and heading north above 1.0800, which is a sign of a bullish trend. Most possible targets cluster around 1.0900, and possible lows are higher than they were last week.

Source: Team CurrencyVeda