The European currency has made a significant leap, taking advantage of some of the dollar's confusion. The latter has repeatedly recovered from its falls, but now it's losing to its rival in the EUR/USD pair. However, experts warn that it is too early to rest on its laurels, because the euro's rapid flight can come to a stop at any moment.
The global banking system is currently trying to cope with financial stress, and not without success. According to currency strategists at ING Bank, at the moment, monetary authorities have managed to stabilize the markets. However, traders and investors are concerned about the fate of Deutsche Bank and other European creditors. ING believes that after the collapse of Credit Suisse it is difficult for European bank bondholders to restore confidence in the financial system.
However, concerns in the banking sector do not only affect the United States. ING says that the European banking system may also come under attack. Therefore, the euro will have to defend its position harder to stay afloat.
According to ING, in the near future, the euro will rise against the dollar amid divergences in monetary policy of the European Central Bank and the Federal Reserve. ING analysts claim that EUR/USD could move towards 1.1000. The bank draws attention to the pair's retest of the 1.0900 mark, which is "desirable for the bulls on the EUR/USD pair." The next level of bullish resistance is near 1.1185, analysts said. On Tuesday morning, March 28, EUR/USD traded in the range of 1.0811-1.0812, breaking through the psychologically important level of 1.0800 and making new highs.
According to experts, the single currency will be able to keep the upward momentum and remain above the 1.0800 mark in the coming days, as concerns about the stability of the banking sector fade away, and the ECB interest rate forecast remains in focus. Recently, the euro was trading near a six-week high, simultaneously exceeding 1.0900. However, the euro's rally was interrupted by concerns about Deutsche Bank's situation. This significantly reduced risk appetites and contributed to the euro's fall in financial markets.
At the moment, the situation has stabilized, although analysts' opinions on the prospects of the single currency differ markedly. According to experts, further developments in global markets will depend on inflation data in Europe and the United States, the release of which is scheduled for Friday, March 31. Take note that on Thursday, March 30, Spain and Germany will publish their consumer price indices. According to preliminary calculations, strong macro data from these countries will support the EUR/USD pair and help the ECB determine the nearest monetary policy course.
Earlier, the euro received support from the data of the business climate index in Germany, published on Monday, March 27. According to current reports, in March, this indicator, provided by the IFO research Institute, unexpectedly soared to 93.3 points from February's 91.1 points. According to IFO analysts, this indicates the stabilization of the German economy, which is growing, "despite serious problems in some international banks."
According to currency strategists, the IFO business climate index has improved significantly compared to the expected figure of 90.9 points. According to economists, the onset of a recession in Germany is unlikely, but this possibility cannot be completely ruled out.
Assessing the state of the eurozone banking system, ECB representatives emphasize that it is "well prepared for adverse scenarios due to high liquidity and sufficient capitalization." Against this background, the central bank improved its forecast for the eurozone economy, but did not give any signals regarding further rate hikes. According to analysts, the acceleration of core inflation in the EU may slow down their increase. According to economists, inflation in the eurozone will decrease from the current 8.5% to 7.5% in March. At the same time, the more important indicator that the ECB is targeting, namely the base inflation rate, will grow from 5.6% to 5.7%. Recall that this month, the central bank raised its expectations about economic growth and canceled previous forecasts for core inflation, which better reflects the internal inflationary pressure in the eurozone.
According to Luis de Guindos, Vice President of the ECB, "headline inflation will decline quite rapidly over the next six to seven months". The official drew attention to the confident approach of the inflation rate to the target 2%. However, experts warn against resting on their laurels as any unexpected growth of inflation in the EU will provoke a new wave of market expectations regarding further ECB rate hikes. Against this background, the single currency will be undermined and the EUR uptrend will be questionable, analysts warn.