Today’s trading session, Wednesday, is the most important for the financial markets in general, and for the EUR/USD currency pair, in particular. Prior to that, the most famous currency pair in the forex market moved towards the resistance level of 1.0788, its highest in a month. Today, the US central bank will announce its first policy decisions after the recent severe banking crisis. Before that, and last week, the European Central Bank passed a rate hike as expected, and the markets are waiting for what will happen from the US central bank.
The US dollar is expected to finally rise against the euro in the coming weeks and months, say analysts at Danske Bank. In this regard, the Scandinavian lender says that the US dollar appears ready to benefit from the “tightening” of global financial conditions and strong investor demand for US stocks and bonds. For his part, says Jens Nærvig Pedersen, forex analyst at Danske Bank: “One of the main assumptions behind our forex forecast is the assumption of a strong US dollar and tightening of global financial conditions.”
The call comes amid turmoil in the global banking sector, prompting investors to bet that central banks will ease the pace with which they raise interest rates. The US dollar has proven volatile in this environment, having fallen amid news of the failure of the Silicon Valley bank and concerns about smaller regional lenders. The developments prompted investors to reduce their expectations for further interest rate hikes by the Federal Reserve, which is negatively affecting US yields and the dollar. Market price movements over the past week indicate that investors are relatively optimistic about the outlook for banks in the Eurozone.
EUR/USD was as low as 1.0516 on March 15 as concerns about Swiss lender Credit Suisse came to a head, but the pair has since rebounded to current levels near 1.0770.
“We are cautiously optimistic about easing systemic risk concerns, although we acknowledge that the outcome space is very wide,” the bank’s analyst added.
The euro was tracking European bank stocks which fell as concerns mounted on Credit Suisse, before recovering after the subsequent acquisition by UBS and assurances from authorities in Switzerland, the Eurozone and the UK that the potential for contagion was limited. Lee Hardman, Senior Currency Analyst at MUFG Bank, said: “By taking the risk off the table for a more turbulent outcome in Credit Suisse that could have been more disruptive to financial stability in Europe, the deal helped mitigate downside risks for the euro on near term. And the price action of the EUR/USD corresponds to this point of view.”
Easing concerns will allow investors to focus on returning to the strong US economy and the possibility of the Federal Reserve increasing US interest rates. This, and rising interest rates around the world will lead to a tightening of global financial conditions.
The analyst added, “Financial conditions have tightened recently, which helps explain the decline in the EUR/USD pair, but we believe that more may come and keep our expectations file as it is.” Danske Bank maintains its bearish EUR/USD strategic stance, maintaining a bearish slope profile forecasting EUR/USD at 1.02 in 6-12 months.
But the euro is unlikely to break below the par rate against the dollar again; The forecast risk is that the Fed will deliver an actual policy pivot, cutting interest rates.
Danske Bank believes that such an outcome will arise due to systemic risk concerns or a weaker US economy than currently expected. But Danske Bank’s predictions of stronger euro and dollar weakness are faced by analysts at Société Générale. In a regular daily note to clients, Kit Jukes, Head of Forex Research at Soc Gen, says that higher bond yields in the eurozone compared to the US will act as an irresistible bullish force on the euro and the dollar.
- The price of the EUR/USD currency pair may remain in its cautious upward retracement path until the reaction to the important and influential data and events this week led by the US Federal Reserve announcement today, in addition to any developments in the global banking crisis.
- According to the performance on the daily chart below, the currency pair is in the first break of the downtrend, and it may need to test the resistance levels 1.0820 and 1.0945, respectively, to confirm the bulls’ control.
- The EUR/USD currency pair broke the support levels at 1.0695 and 1.0580, to end the last rebound attempt, and to confirm that the bears are determined to move the currency pair to deeper support levels.