Was Euro sale justified? Forecast as of 27.03.2023

2023.03.27 2023.03.27
Was Euro sale justified? Forecast as of 27.03.2023

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

Another bout of panic in the markets of Europe, this time due to the German Deutsche Bank, pushed down EURUSD to 1.0715.  However, have investors rushed to sell the euro? Let’s discuss this topic and make up a trading plan.

Weekly Euro fundamental forecast

White starts and wins. In fact, this does not always happen. If you start with a rate hike, then this is good news for the currency, and if with a recession, then bad. The recession in the US economy may come earlier than in other countries, which is unpleasant news for the US dollar. On average, it fell by 5.5% when the US fell into recession, and the compound data for 30 states did not. On the contrary, when the GDP of the US and the rest of the world shrank together, the USD index grew by 4.6%.

One of the reasons for the 2022 EURUSD fall was concerns about the recession in the eurozone under the influence of the energy crisis. However, the worst-case scenario was avoided. Moreover, in March, business activity in the eurozone reached a 10-month high of 54.1, despite the banking crisis and the takeover of Credit Suisse by its competitor UBS.

Dynamics of eurozone business activity

Source: Financial Times.

The euro decline to $1.0715 was caused by fears that problems had spread from Switzerland to Germany. Investors felt that Deutsche Bank was the next victim. In fact, the DB is stable. Net profit in 2022 reached $6.1 billion (a 15-year high), in contrast to Credit Suisse’s $8 billion net loss. Net interest income increased by 39%. Liquidity and capital indicators were stable. When there is a panic in the market, investors first sell, and then try to understand what has happened.

The improved state of the economy and a strong banking system allows the ECB to be the main hawk among the major regulators of the world. Unlike the Fed, which raised rates by only 25 bps in March and hinted at a pause, ECB added 50 bps. Christine Lagarde said that the return of inflation to the 2% target in the eurozone is not negotiable.

EURUSD is focused on divergence in monetary policy against the background of a reduction in the yield differentials of US and German bonds. In mid-March, the gap decreased to 70 bps. The last time such a figure was recorded in 2021, when the euro was trading above $1.21.

Dynamics of EURUSD and the yield differential of US and German bonds

Source: Bloomberg.

According to Societe Generale, Citi and Deutsche Bank, inflation in the eurozone will create an additional impetus for EURUSD and push the pair to 1.1. In this regard, the release of consumer price data for March is the key event of the last week of the month. Despite the slowdown in CPI predicted by Bloomberg experts, the base indicator is able to grow to a new record of 5.8%.

Weekly EURUSD trading plan

The panic around Deutsche Bank has created a great opportunity to buy EURUSD cheaper. As mentioned earlier, while the main currency pair is above 1.0715, focus on long trades. Add up to them in case the euro returns above $1.08 and $1.0825.

Price chart of EURUSD in real time mode