EUR/USD is again trying to approach 1.07, taking advantage of the US dollar's malaise. Nevertheless, despite the bullish momentum, it is still risky to go long. Following the ECB policy meeting in March, the currency pair updated its one-year low and then regained its footing amid a decline in the US dollar. The instrument is trading higher today on the back of the weakness of the US dollar which is losing favor with investors as a safe haven asset. At the end of the trading week, investors revived interest in risky assets despite worrisome news from the US.
Turmoil in banking sector
The US banking sector is going through turmoil. A week ago, the sector was bruised by the most severe bankruptcy after the financial crisis of 2008. Silicon Valley Bank, one of the major banks for high-tech start-ups, collapsed. SVB used to be the 16th largest American bank in terms of asset size. A day later, the next big bank, Signature Bank, also went bankrupt. Its assets value was estimated at $110 billion in late 2022. Some more financial institutions are also running a risk.
The US authorities managed to soothe market jitters in a few days. The Federal Reserve pledged to provide the ailing banks with extra bailout so that they could meet their commitments to investors. Yesterday, it was reported that First Republic Bank whose deposits equaled $176 billion at the end of 2022 encountered the same problems as SVB. First Republic shares slumped by almost 80% in a week. Now it is known that First Republic serves the same clientele as Silicon Valley Bank. In the sake of the collapse of the latter, it is also on the verge of bankruptcy due to massive deposit withdrawals.
Amid such news, the safe haven US dollar is advancing across the board. Credit Suisse added fuel to the fire. Its shares nosedived by nearly 30% intraday. Stocks of large European banks went sharply lower whereas EUR/USD updated a one-year low of 1.0517.
Interestingly, today on the final day of the week, the fundamental background is a bit different. The euro bulls detected some optimistic signals which enables them to take the lead.
Glass half full?
Top 11 American banks, including JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, announced an emergency package worth almost $30 billion to rescue First Republic Bank. Fed Chairman Jerome Powell and Chairman of the FDIC Board of Directors (Federal Deposit Insurance Corporation) Martin Gruenberg published a joint statement where they estimate the rescue package. They say that such measures prove the resilience of the banking system. At the same time, some sceptics reminded that back in 2008, large banks also provided collective aid to ailing banks in the first days of the crisis. Nevertheless, the joint statement toned down the level of risk aversion across financial markets.
Good news came from Europe. Credit Suisse decided to strengthen liquidity as a precautionary measure by borrowing 50 billion francs from the Swiss National Bank. In turn, the Swiss National Bank claimed its readiness to inject extra liquidity into Credit Suisse. The overall fundamental picture is complemented by the Governor of the Saudi National Bank, saying that the panic around Credit Suisse is unjustified. From his viewpoint, Credit Suisse doesn't have to seek extra capital because it is healthy. As a result, Credit Suisse shares surged by more than 35%, thus quelling the panic mood among investors.
The euro found extra support from member of the ECB Board Madis Mueller. He said that there are not many banks in the Eurozone to risk in the same way as SVB.
Conclusion
The current fluctuations of EUR/USD are caused by temporary factors. Snags of large American and European banks are high on the agenda. However, such newsworthy events commonly pop up and fade away quickly. If First Republic Bank becomes the last chapter in this odious story, forex traders will shift focus back to classical fundamental factors. Besides, the Federal Reserve will hold its policy meeting next week. This high-impact event is sure to spark higher volatility in EUR/USD.
Meanwhile, the ECB didn't serve as the euro's ally, though it raised the refinancing rate by 50 basis points. Further prospects of monetary tightening are in question now. Will the Federal Reserve become the US dollar's ally? Also an open question. This issue will set the tone for the market sentiment from Monday. If the US banking system is not shaken by aftershocks, the market will be looking forward to the Fed's regular policy meeting where the US central bank will unveil its policy update. It will happen on March 22.
Bearing in mind the way the market trades on Fridays and fragile reasons driving EUR/USD up, it makes sense to take a wait-and-see approach for the time being. Moreover, despite the upward bias, the euro bulls failed to overcome the nearest resistance level of 1.0670 (the lower border of the Kumo cloud coinciding with the Kijun-sen line) on the daily timeframe. Such developments prove that long positions are unreliable.
