FOREX Fundamental analysis for EUR/USD on March 27, 2023
Recession in the U.S. economy may start sooner than it was expected by Jerome Powell's team and earlier than in other countries. This is not particularly good news for the dollar.
In 2022 one of the main factors of EUR/USD falling down was the fear of the European economy recession because of the energy crisis. However, everything was not so sad and in March 2023 Eurozone business activity returned to a ten-month high of 54.1 p.
The dynamics of European business activity
Nevertheless the greenback is still trying to recoup its losses, as investors fear that the problems of Credit Suisse can spill over to the Eurobloc financial system. A number of analysts consider Deutsche Bank to be the next victim, although the position of the main German lender is quite stable. At the end of 2022, the bank's net profit reached $6.1 billion, which is a maximum for 15 years. Liquidity and stability indicators are as strong as ever. But investors began to get rid of the euro quickly, which led to a decline of EUR/USD
The strong banking system and economic recovery will allow the ECB to become the main "hawk" among central banks of developed countries unlike the Fed, which raised rates by only 25 basis points in March and signaled about a possible pause in monetary policy tightening. The European regulator, meanwhile, added 50 basis points. And Christine Lagarde announced the regulator's intention to bring inflation back to 2%.
Now the divergence in monetary policy rates has turned to the ECB. The yield differential between U.S. and German bonds has narrowed to 70 basis points. This differential was last seen in 2021. At that time, EUR/USD was trading above 1.21.
EURUSD and the U.S. and German bond yield differential
Many experts believe that in the current environment EUR/USD will head towards 1.10. In this regard, Eurozone inflation data is of particular interest. According to Bloomberg, CPI will slow down in March, but the core inflation may show a new record of 5.8%.
I think that the EURUSD decline is a good buying opportunity. The pivot level for the pair is 1.0715. As long as the quote remains above, we focus on long positions. At a breakout of 1.08 and 1.0825 we plan to increase buying.