24.03.2023 09:32 AM
US banks take advantage of Fed's liquidity

The euro and the pound sterling are slowly edging lower against the dollar. The reason for that is a technical correction, which usually occurs after a volatility surge. Meanwhile, traders are bracing for a buying spree of risk assets in the wake of the Fed's cautious stance on monetary policy. American banks are getting more dependent on the regulator's new lending program introduced after the collapse of Silicon Valley Bank this month.

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The latest data shows that banks have already borrowed more than $53.7 billion under the Bank Term Financing program, up from the $11.9 billion borrowed last week.

Lenders are currently experiencing unrealized losses from investments in bonds due to rising interest rates. This is what caused the collision of SVB. The company had to sell securities worth $2 billion at the beginning of this month. Clearly, the higher the interest rate in the US, the lower the demand for bonds, which results in losses on open positions.

Many expected the Fed to pause tightening this week. However, the central bank made it clear that it would continue raising rates if needed to bring inflation to the target level.

Meanwhile, the new financing program, which was introduced on March 12 to ease the burden on banks and other institutions, is now in full swing. Banks were quite cautious about it only a week ago. However, they are now taking advantage of the regulator's liquidity under new conditions for annual loans secured by treasury bonds or other reliable assets.

Loans to the shut banks to pay off obligations to depositors rose to $179.8 billion from $142.8 billion the previous week.

Meanwhile, banks' use of the discount window, the traditional way of borrowing from the Fed, has decreased to 110.2 billion from 152.8 billion in the previous week. With the discount window, securities are provided at a market value instead of a nominal value, and loans can be extended up to 90 days compared with the BTFP's annual loans.

It is hard to say how much this affects the greenback in the forex market.

As for EUR/USD, the bulls may push the pair to March highs after consolidation above 1.0800 support, targeting 1.0840, 1.0880, and even 1.0930. In case of a fall in value, bullish activity may increase only near 1.0800. Otherwise, it will be wiser to wait until the price reaches the 1.0760 low or open long positions at 1.0725.

Speaking of GBP/USD, the bulls are heading toward monthly highs. The Bank of England remained hawkish on interest rates to bring inflation to the target rate. We will see a bullish continuation if the buyers manage to stay above 1.2230. They also need to break above 1.2290 and 1.2330. After a breakout, the pair will head toward 1.2390 and then surge to 1.2450. If the bears take the market under control above 1.2220, a breakout through this range will drive GBP/USD to the 1.2180 low, with the target at 1.2120.

Jakub Novak,
Analytical expert of InstaForex
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