The EUR/USD has been showing strength, reaching fresh highs at the 1.0642 level in the Asian markets. This move is attributed to the continued weakness in the US Dollar Index (DXY), which is on a corrective course. As a result, analysts predict that the EUR/USD pair will continue to deliver gains in the coming weeks, as it has extended its recovery cycle by moving above the 1.0636 level.
However, the DXY is rebounding from its 48-hour lows at 104.17, and analysts expect this slip to continue due to the escalating uncertainty around Fed rates. The European Central Bank (ECB) added to this uncertainty on Thursday by announcing a very hawkish 0.50% rate hike to tame the persistent inflation pressures in the Eurozone.
According to Christine Lagarde, the ECB chose to ignore the potential volatility that rate hikes could cause, despite concerns that they could worsen the banking crisis. Instead, she emphasized that the current economic conditions require tough monetary policies.
The S&P 500 features indicate a correctional mood after the recovery on Tuesday, as investors chose to ignore the banking crisis and applauded the rising odds that the Fed will switch to a dovish stance. The DXY is facing the heat amid the recovery in risk appetite in the US. However, there has been a minor uptick in demand for treasury yields, trimming the treasuries. The ten-year yield is currently at 3.56%.
Banking Turmoil and The Need for Steady Monetary Policy
Investors and market participants are very worried about the January economic indicators that suggest the Fed will implement another 50 basis point rate hike to strengthen its competitive edge against stubborn inflation.
However, despite higher job rates and lower PPI, the monthly rise in CPI and retail demand show that January’s good data was a fluke and that the Fed cannot slow down the rate hikes.
On the other hand, the steady decline of banks over the last week has caused fears that there will be a global bank meltdown, which could join the inflation scenario in stemming the odds of an unchanged stance from the Fed.
Moreover, after SVB and Signature collapsed, the credit Suisse debacle showed that banking contagion could be a reality and that global banks may start feeling the effects soon. Despite the problems with Credit Suisse bank, the ECB did decide on a huge rate hike.
Even though the decision had been made earlier, market participants expected the bank to revise the rate hikes. According to Reuters, the ECB policymakers wanted a 50 basis point rate hike and went ahead after the SNB provided Credit Suisse bank with a lifeline. It is also clear that there was no talk about a 25 basis point rate hike for the policymakers.
EUR/USD Technical Analysis
Based on the information provided, the pair referred to is EUR/USD. The pair has been testing the 50% Fibonacci retracement level at the Wednesday high of 1.0760 and the low of 1.0516. Currently, the pair is trading above the 20-day and 50-day exponential moving averages (EMAs), currently at 1.0617 and 1.0626, respectively.
It indicates a bullish trend for the pair. However, the relative strength index (RSI) is in the 60-80 range, typically considered bullish due to upside momentum. The RSI is trying to shift from this range, indicating a potential shift in momentum.