20.03.2023 01:48 PM
EUR/USD: Credit Suisse bailout and traders' caution

At the beginning of a new trading week the euro-dollar pair failed to determine the vector of its movement. Although EUR/USD opened with a bullish gap and rose to the border of the 7th figure, the buyers couldn't keep the height: during the European session, the sellers took back the initiative, dragging the price back to the midpoint of the 6th figure.

The event during the weekend failed to radically redraw the fundamental background of the pair. We are refering to the bailout of Credit Suisse, the largest bank of Switzerland (and Europe in general). This fact reduced the overall tension in the markets and could have contributed to strengthening of euro amid decline in the risk sentiment, but traders ignored this event, remaining cautious. Although, it is understandable, given that the day after tomorrow, the Fed will announce the results of its March meeting.

Credit Suisse Bailout

Switzerland's largest bank, UBS, has agreed on Sunday to buy Credit Suisse for $3.25 billion. UBS will also absorb losses (approximately $5.4 billion) in a deal that will close before the end of this year. Negotiations took place over several days with the mediation of Swiss regulators.

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We cannot say that the happy ending of this story was a predictable event: according to media reports, the negotiations were difficult, and the situation itself was, as they say, on the verge: an emergency credit line of $54 billion provided for Credit Suisse by the Swiss central bank could not stop the sharp fall in the bank's shares, which intensified after the collapse of U.S. SVB.

Therefore, it is not surprising that when an agreement on the deal was finally reached, the Fed Chairman, U.S. Treasury Secretary, and ECB president welcomed the decision in special statements. In particular, Christine Lagarde said that the rescue of Credit Suisse through the Swiss National Bank would "restore calm in the financial markets."

The merger will create the largest bank in the European region, given that UBS has $1.1 trillion in total assets on its balance sheet and Credit Suisse has $575 billion.

The market is cautious

Despite the successful completion of the bailout, the importance of which is difficult to overestimate, the market reacted coldly to the event. At the start of trading, EUR/USD tried to develop an upward movement, but the upward momentum quickly extinguished. During the European session, buyers took the initiative, who, however, also failed to develop a large-scale downward offensive. The controversial German statistics released this morning did not help the parties as it left more questions than answers. On the one hand, the producer price index came out in the green, exceeding forecast levels. On the other hand, the index again reflected a downward trend. For example, on an annualized basis, the PPI has declined for the fifth month in a row, reaching 15.8% in February (the lowest growth rate since October 2021). The market ignored this release.

Clearly both EUR/USD bulls and bears are cautious ahead of the March Fed meeting. The situation is complicated by the "silence mode" in force since last Monday: within 10 days before the meeting the Fed members have no right to publicize their positions. That's why the market is forced, so to speak, to independently estimate the current events, predicting the possible results of the March meeting. And judging by the data of the CME FedWatch Tool, traders are still hesitating between two hypothetically possible options. Thus, the probability of a 25-point rate hike is now 55%, while the probability of keeping the rate at current levels is estimated at 45%, respectively.


The current situation a priori does not imply strong "one-sided" volatility: both buyers and sellers of EUR/USD remain cautious, fixing profits as soon as the pair approaches either the 7th figure or the 5th price level. This situation will apparently continue until the announcement of the results of the March meeting, and most likely until the end of the final press conference of Jerome Powell.

All other fundamental factors are now of secondary importance. Even Lagarde's rhetoric, who will speak today before the Committee on Economic and Monetary Affairs of the European Parliament, is unlikely to radically change the fundamental background. Moreover, just last week, the ECB raised interest rates by 50 basis points. At the same time the European Central Bank maintained the intrigue concerning its further actions, and it is unlikely that Lagarde will specify the intentions of the central bank today.

Thus, given the high degree of uncertainty, EUR/USD is likely to trade in a relatively narrow price corridor, within the 6th figure, until the results of the Fed meeting (Wednesday, March 22). In such circumstances it would be best for the pair's traders to maintain a wait-and-see attitude.

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