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19.03.2023 04:00 PM
EUR/USD. The roller coaster ride for the dollar: the most interesting is yet to come

The EUR/USD pair ended the trading week at 1.0667, not far from the opening price of 1.0647. Looking at the weekly chart, we can see that the pair has been showing weak growth for the second week in a row: the opening price is almost the same as the closing price. And if we close our eyes to the intra-week volatility, we can come to the conclusion that the pair is stuck in a flat within the 6th figure. But it isn't. The daily chart paints a completely different picture. For example, last week, the low was fixed at 1.0517 and the high at 1.0761. That is, despite the modest final results, the pair fluctuated almost in the 250-point price range for five days. However, at the finish line, traders actually returned to their starting point. There is no doubt that next week, bulls/bears will again try to turn the tide in their favor.

Powell, Nonfarm and the Banking Crisis

The rich information background of the last two weeks did not help either the bears or the bulls. Federal Reserve Chairman Jerome Powell initially set the tone for trading, toughening his rhetoric while speaking in the US Congress. He allowed the pace of the rate hike to accelerate (apparently up to 50 points) and actually announced a higher final rate. Then Nonfarm was published in the US, which disappointed the dollar bulls. The unemployment rate in the United States rose in February to 3.6%, while most experts predicted a different result - 3.4% (the figure was at the same level in January). The salary indicator also came out in the "red": the average hourly wage increased by 0.2% on a monthly basis and by 4.6% on an annualized basis. While analysts expected a more significant increase - 0.4% m/m and 4.7 y/y.

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After the release of the Nonfarm report, the market questioned whether the Fed members would actually decide on a 50-point rate hike in March. But subsequent events have cast doubt on the advisability of a rate hike in principle - at least in the context of the March meeting. The collapse of the Silicon Valley Bank in the US rattled the markets and put a lot of pressure on the greenback. People also started to talk about a dovish stance: some experts suggested that the Fed would refrain from increasing the rate at the next meeting, while others even predicted its decrease.

Naturally, amid such rumors, the US dollar index index renewed its multi-week low and the pair has consolidated within the frame of the 7th figure. Moreover, after the collapse of Silicon Valley Bank another large bank (Signature Bank) closed and the shares of First Republic Bank fell almost by 80% within a week.

Still, after weighing the pros and cons, traders concluded that the Fed would not pause this month, but would also not go for a 50 bps rate hike. The most likely scenario is for the Fed to maintain its 25-point rate. Thus, the CME FedWatch Tool shows a 38% probability of a pause and a 62% probability of a 25 bps rate hike on March 22. As for the next meeting in May, the market is leaning towards a pause.

Last week's data on inflation growth in the US allows the Fed to increase the rate at a moderate pace. The Consumer Price Index came out at the forecasted level (reflecting a decline in key indicators), and the Producer Price Index was in the red. But the indicators are still at unacceptably high levels, forcing the Fed to retaliate.

What next?

Take note that last week's information background was intense, but also chaotic. It should be thematically divided into two groups of the main factors, which influenced the price behavior. On one side - bank crisis in US (the problems of Swiss Credit Suisse are also included), on the other side - key macro data, European Central Bank meeting and forthcoming meeting of Fed.

In my opinion, by the end of the week, the market started to switch gradually to "classic" fundamental factors. U.S. regulators were able to "put out the fire" in the banking sector: in particular, the Fed promised to provide banks with additional funding so they could meet all depositors' demands. When First Republic Bank announced its problems, its competitors unexpectedly came to its aid: The 11 largest U.S. banks announced a $30-billion rescue package to prevent the bank's collapse. As for Credit Suisse, it became known at the end of last week that its management decided to preventively strengthen liquidity through its intention to sell an option and borrow up to 50 billion francs from the Swiss National Bank. The SNB, for its part, announced its readiness to provide additional liquidity.

In other words, at the moment there is a high probability that next week the market will shift its focus to "classical" fundamental factors. Unless, of course, banks in the US burst - for example, according to information from The Wall Street Journal, almost 200 banks in the US can repeat the fate of SVB, in case of withdrawal of funds by uninsured depositors. But excluding such force majeure in forecasts, we can assume that traders will just focus on waiting for the Fed's meeting.

The ECB has already said its word: the central bank has increased rates by 50 points but did not announce any further steps in this direction (thus putting pressure on the euro). The Fed seems to implement the most expected (25-point) scenario as well. Therefore, the main intrigue will be the revision of the Fed's point forecast, the tone of the accompanying statement and the tone of Powell's rhetoric.

I believe that this intrigue will persist until the last minute, so until the results of the March meeting are announced, the pair is likely to fluctuate within the sixth figure. Given the high degree of uncertainty, traders are unlikely to determine the vector of price movement before the "X-hour", so it is advisable to maintain a wait-and-see attitude on the pair.

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