FOREX Fundamental analysis for EUR/USD on March 28
The risks of the banking crisis force the Fed to backtrack and develop the idea of a "dovish" reversal. This lights a green light for the European currency and other risky assets.
Of course, the threat of bankruptcy is forcing banks to tighten lending, which reduces lending and negatively affects economic performance. This increases recessionary risks. The difficulty is that these processes are going on all over the world. Not surprisingly, after the collapse of U.S. banks, the Credit Suisse story surfaced and rumors about the unreliability of Deutsche Bank emerged.
The monetary authorities have to choose between fighting inflation and stabilizing the banking system. It is no coincidence that expectations of a peak rate from the Fed have fallen from 5.75% to 5.0% in a month. CME derivatives with a 62% probability predict a pause in monetary tightening at the May FOMC meeting and a rate cut of 100 basis points at once by the end of 2023.
Expected Federal Funds Rate Trends at Fed Meetings
It is noteworthy that only a day ago, the probability of such a scenario was 83%. Investors were reassured by Deutsche Bank reports and First Citizens Bank's statement that it was ready to acquire a controlling stake in the collapsed SVB. The news boosted the yields on treasuries and kept the dollar from falling. Moreover, the well-known in the financial world the manager of the largest fund Black Rock believes that the Fed will continue to raise rates and has no plans to reduce them this year.
Indeed, if investors are once again fooled by the Fed's "dovish" reversal, EUR/USD will come under pressure. A similar pattern was seen in February when EUR/USD fell below 1.055 after Jerome Powell's hawkish speech in Congress.
The dynamics of the supposed peaks of central banks rates
It turns out that with good conditions for the growth of EUR/USD there are still risks of strengthening of the dollar. Forex trading at the end of March promises to be quite tense and we might say, nervous. If the pair fails to rise above 1.08, there will be a signal for short-term selling. If the "bulls" pass the resistance, the next target is 1.089.