Euro didn’t break anything. Forecast as of 17.03.2023

2023.03.17 2023.03.17
Euro didn’t break anything. Forecast as of 17.03.2023

Dmitri Demidenkohttps://www.litefinance.org/blog/authors/dmitri-demidenko/

The ECB could have abandoned its 50 bps deposit rate hike plan amid financial market turmoil. However, this did not happen. Why? Let’s discuss this topic and make up a trading plan for EURUSD.

Weekly Euro fundamental forecast

When markets are in turmoil, the sudden refusal to raise the deposit rate to 3% could be seen as the ECB losing control. In fact, there is a feeling that fighting inflation continues to be a priority for Christine Lagarde and her colleagues, which is good news for EURUSD. Bloomberg insider claims that discussions within the Governing Council were that anything other than a 50 bps borrowing costs hike would increase the market panic level. But who knows what happened behind closed doors?

The euro’s first reaction to the results of the ECB meeting was to fall. The European regulator has given plenty of dovish signals. The bank refused to continue to raise rates at a steady pace and also significantly reduced its consumer price forecasts for 2023 from 6.3% to 5.3% and for 2024 from 3.4% to 2.9%.

ECB Inflation Forecasts

Source: Bloomberg.

This indicates that the fight against high inflation will end sooner than expected. Not surprisingly, the derivatives market has reduced the expected peak of the deposit rate from 4.2% to 3.2%. ING believes that the ECB’s March move may be the last, as with each new act of monetary restriction, the possibility that something will go wrong will increase.

One of the proofs that the monetary tightening cycle is over is the fall in the yield of two-year German bonds below the ECB rate.

Dynamics of German two-year yield and ECB rate

Source: Bloomberg.

Everything will depend on how the situation in the US and the eurozone banking sector develops. If stability continues, the ECB will continue to raise rates. If the situation worsens, it will have to pause the process. In this regard, Christine Lagarde’s words that the European banking system is in excellent condition (significantly better than in 2008) and the ECB has plenty of room to help is bullish for EURUSD.

The desire of major US banks to help First Republic Bank by providing $30 billion in liquidity is also bullish. Investors have been watching closely for similar signs since the failures of Silicon Valley Bank and Signature Bank, so the willingness of industry peers to help was positively received by the US stock market. The stock index rally has pushed the EURUSD quotes even higher.

Weekly EURUSD trading plan

The banking crisis will have an impact on various industries. However, the readiness of the Fed, the ECB, other regulators, and some institutions to help those in need shows that the situation will soon stabilize. The EURUSD buying strategy (when the price returns above 1.0575) works out, while a breakout of the resistance at 1.0665 makes it possible to add up to longs.

Price chart of EURUSD in real time mode