FOREX Fundamental analysis for EURUSD on March 17
In the atmosphere of an impending banking crisis the main goal of the ECB was not to cause any harm. The regulator might well have abandoned the monetary restriction or conducted it in a smaller volume, but Christine Lagarde's team acted according to the initial plan and raised the rate by 50 basis points.
Investors understood that the ECB is in control and still considers the fight against inflation in the Eurozone a priority. This is a good sign for the single currency, though the initial market reaction to the Central Bank's decision was a fall in EURUSD. The reason was clearly "dovish" signals of the regulator that refused a steady pace of rate hikes and lowered its forecasts for the year-end consumer price index from 6.3% to 5.3% and for 2024 from 3.4% to 2.9%.
European Central Bank Inflation Forecasts.
It appears that the ECB will finish the inflation battle faster than previously thought. In this regard, the futures market has quite logically lowered the maximum rate forecast from 4.2% to 3.2%. Confirmation of the fact that the cycle of monetary restriction is in the stage of completion is the fall of German 2-year bond yields below the ECB rate.
Dynamics of German bond yields and the ECB rate.
However, it is likely that much in the ECB's actions will depend on external factors, in particular, on the situation in the banking sector in the United States and the Eurozone. If the situation stabilizes, the regulator will continue to raise the rate, the more so since Christine Lagarde said the Eurozone banking system is in excellent condition and assured that the ECB has enough funds to support the financial structure.
In the U.S. the big banks also expressed their willingness to support the First Republic Bank and provide it with additional liquidity worth $30 billion. This news supported the stock market, and through the correlation of currencies, the buyers of risky assets.
It's not impossible that the banking crisis will still make itself known, but the willingness of the Fed, the ECB and the major financial institutions to help the euro buyers in trouble. Our trading method on Forex remains the same - after EUR/USD returns we open longs, and after the pair's fixation above 1.0665 we will increase the longs.