Sooner or later, the Fed’s monetary tightening should have led to a certain result. No matter how much the US banks did not hide the truth, in the end, problems manifested themselves. How many more skeletons does the US economy have in its closet? Let’s discuss this topic and make up a trading plan for EURUSD.
Weekly US dollar fundamental forecast
Fed officials must not only fight inflation and ensure financial stability but also be well-versed in psychology. In theory, the refusal to raise the federal funds rate during a banking crisis could calm financial markets. But will it happen? A week ago, the Fed intended to raise borrowing costs by 50 bps. If the regulator pauses due to bankruptcies, then the situation is very bad. The situation is similar in Europe. Bets on ECB’s bold actions pushed EURUSD above 1.075.
US inflation data for February proved that the Fed can’t afford to stick to the wait-and-see attitude. Consumer prices slowed down from 6.4% to 6% YoY, and core inflation from 5.6% to 5.5% (as predicted by Bloomberg experts). However, the latest indicator’s acceleration to a 5-month high of 0.5% MoM indicates continued upward price pressure.
Dynamics of US inflation
Source: Wall Street Journal.
Although the failure of the SVB forces the Fed to make a difficult choice between price and financial stability and serves as the first sign of an approaching recession, the central bank must act boldly. If a downturn is imminent, the Fed needs to create a safety cushion in the form of high rates to lower them later. In this regard, the 80% chance of borrowing costs increasing by 25 bps at the March FOMC meeting looks logical.
The chances of such a move increased from 65%, which allowed treasury bond yields to grow as well. At the same time, the plan to rescue the banking system, undertaken by the Fed and other regulators, finally received positive feedback in the stock market. The combination of rising stock indices and debt rates is no less negative for the US dollar than the fall of the S&P 500 and Treasury yields. It indicates an improvement in global risk appetite and contributes to the continuation of the EURUSD rally.
Dynamics of US stock indices
Source: Wall Street Journal.
The market believes that the Fed will stick to its way, even if skeletons continue to emerge from the closet due to the delayed effect of monetary policy on the economy. Actually, it helps the euro. It is unlikely that the SVB bankruptcy will force the ECB to refuse to raise the deposit rate by 50 bps to 3% on March 15. However, Christine Lagarde may order not to take the same step in the future. She will speak belligerently but evasively.
Berenberg believes the ECB will hint at future monetary tightening but decline to say exactly what it will be. Pictet Wealth Management predicts the SVB collapse will make the European regulator act more cautiously. This may lead to exiting euro longs.
Weekly EURUSD trading plan
So far, everything is going according to plan. The inability of the EURUSD bears to keep the price below 1.0705 led to the rally continuation, while the idea of the uptrend recovery is still relevant. Another thing is that the levels of 1.076 and 1.08 can stop the bulls for a while.
Price chart of EURUSD in real time mode
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