29.03.2023 05:30 PM
EUR/USD to shoot up, but not too far

While ECB officials are talking, EURUSD continues to rise. No matter what, about the stability of the eurozone banking system, rate hikes, or even a slowdown in the monetary tightening cycle. Investors see the European Central Bank as a hawk ready to continue its monetary tightening cycle. This contrasts with the Fed, which has signaled a possible end to it. And this is not the only difference between the world's two leading economies. The states are now much closer to recession than the currency bloc, and this is bad news for the U.S. dollar.

The less news comes from the banks, the greater the belief that the worst is over. But if the infection spread from Americas to the euro area, the euro would most likely collapse. The fact is that the volume of bank lending in Europe is several times higher than corporate loans, which suggests a greater contribution of credit institutions to GDP. In the U.S., the picture is the opposite.

Dynamics of the ratio of bank loans and corporate loans

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Let's recall how the euro collapsed in response to news of Deutsche Bank's problems. And how the bailout of Credit Suisse helped it. Emotions were running high, but luckily, the storm seems to be over. Investors now have the opportunity to turn their attention to monetary policy. And here, Philip Lane's statement that rates have to be raised anyway, even if the bank crisis is not a zero event, acts as a bullish driver for EURUSD.

According to ING, the main currency pair will soon reach 1.1 and continue to move further up, although this path will be bumpy. The main reasons for the continuation of the rally are the ECB's aggressive narrative and a calmer attitude of investors towards the situation in Europe than in the U.S.

In my opinion, rhetoric alone will not get you far. Currently, the euro is rising on expectations that core inflation in the euro area in March will either rewrite the record high or remain in its immediate vicinity. When important statistics are published, it is possible to implement the principle "buy EURUSD on rumors, sell on facts." Moreover, on the next day, the "bears" might be happy about the release of the U.S. Personal Consumption Expenditures Index for February.

Despite the banking crisis, financial conditions in the United States remain quite soft, which makes it difficult for the Fed to fight inflation.

Dynamics of financial conditions in the USA

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It is quite possible that the dollar willl still fight. It doesn't take much for it to do so. The banking crisis has gone into the shadows, and the market's belief in a 25 bps increase in the federal funds rate in May has returned.

Technically, a 1-2-3 reversal pattern may be formed on the EURUSD daily chart. The necessary conditions are for the quotes to fall below the 1.08 pivot point, and then the pair will return to the fair value range of 1.053–1.076. In my view, the bulls' inability to get a grip on 1.083 will be a reason for short-term selling.

Marek Petkovich,
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