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22.03.2023 11:50 PM
The dollar will be saved and then it will drown

Shocks come and go, but markets remain. It has been a long time since we have seen such shocks as in March. Investors raised the federal funds rate ceiling after the release of the January inflation report and Federal Reserve Chairman Jerome Powell's speech before Congress, then they lowered it amid the SVB bankruptcy, Credit Suisse problem and the release of the US Consumer Price data for February. The spread between a potentially high and a potentially low peak was 77 bp. This has been extremely rare since Fed rate derivatives began in 1994. And it will be up to the Fed to reassure investors.

Dynamics of the difference in the implied rates of the Fed

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What options does the central bank have? Raise the cost of borrowing by 50 bps, causing the markets to panic. Make a smaller 25 bps move, putting more pressure on an already strained banking system. Finally, press pause, letting the world know that the Fed does not believe in financial infrastructure and its own anti-crisis management.

Opinions were divided. If Goldman Sachs expects monetary tightening to be put on hold, then Nomura is talking about lowering the cost of borrowing. BofA believes that the federal funds rate will rise by 25 bps, and given the fact that such a decision is not fully priced in by the market, it will lead to a stronger US dollar. Another bullish factor for the USD index could be Powell's statement at a press conference that financial stability risks can be addressed through targeted measures, leaving monetary policy to fight inflation.

Dynamics of the Fed rate and expectations for it on the derivatives market

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According to Credit Agricole, EURUSD is rising as investors believe the European banking system is more resilient than the U.S. one. However, if the Fed follows in the footsteps of the European Central Bank and raises borrowing costs, they will start buying the dollar as a more attractive currency amid rising US Treasury bond yields. Danske Bank draws attention to the tightening of financial conditions and expects the main currency pair to fall to 1.04 and 1.02 in 3 and 6 months.

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I have a different opinion on this. Even if the FOMC meeting makes investors sell EURUSD, the pair's medium-term prospects remain bullish. Let the federal funds rate rise up to 5,5%, but it cannot stay there for a long time. The U.S. economy simply cannot withstand such a borrowing cost. A dovish pivot will become reality, and with it the era of the strong dollar will pass into oblivion.

Technically, on the daily chart, the uptrend continues. While the pair is above the area of 1.07-1.0715, formed by the upper limit of the fair value range and the pivot level, the bulls dominate the market. The pullbacks should be used to form long positions with previously indicated targets at 1.089 and 1.103.

Marek Petkovich,
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