The biggest U.S. bank failure since the 2008 financial crisis seems to have taken the markets back 15 years ago. Treasury yields are collapsing like they did back then, and stock indices are plunging into the abyss. Thankfully, the U.S. economy is strong now, no recession is in sight, and the Fed, the Treasury, and the Deposit Insurance Fund have a plan. Their joint efforts to guarantee the return of depositors' funds in the bankrupt SVB have calmed investors and saved the "bears" on EURUSD from a rout.
Treasury bond yields and the U.S. dollar dynamics
Markets entered 2023 with fears of an imminent recession in the U.S. economy. They say that macroeconomic statistics will continue to deteriorate due to the most aggressive monetary restriction by the Fed in 10 years, which will eventually plunge the U.S. into recession and force the Central Bank to make a dovish turn. In February, due to pleasant surprises from U.S. macro indicators, investors calmed down, but in March, amid rumors about the bankruptcy of SVB and Signature, fears returned. Now the markets are asking themselves a logical question: can the plan of the Fed, the Treasury and the Insurance Fund protect the banking system?
News of bankruptcies overshadowed the much-anticipated U.S. labor market statistics. The data turned out to be very contradictory: despite an increase in employment by 311,000, unemployment increased to 3.6%, and wages slowed down to 0.2%. Fear over banks and signs of a cooling in the U.S. labor market caused derivatives to reduce the likelihood of a 50 bps hike in the federal funds rate in March from 70% to 30%, which immediately collapsed the USD index. The anticipated peak in borrowing costs also went down from 5.5% to 5%, which, coupled with the return of the idea of a dovish Fed turn in 2023, sent EURUSD quotes above 1.073.
Investors fled from the U.S. dollar to the euro, especially as French Finance Minister Bruno Le Maire called the situation with U.S. banks unique and highlighted their ties to the tech sector that Europe doesn't have.
In fact, everything in the financial markets is interconnected. The flight to quality resulted in the biggest drop in German bond yields in history and a reduction in the expected peak of the ECB's deposit rate to 3.5%. But just a day ago, the derivatives market assumed that the cost of borrowing in the eurozone would rise above 4%, while Bloomberg experts set a forecast of 3.75%.
Bloomberg experts' forecast for the ECB rate
The euro is just as vulnerable to the impending crisis in the U.S. banking system as the dollar, so the retreat of the bulls on EURUSD looks logical.
Technically, a pin bar formation on the daily chart of the main currency pair is a strong bearish signal. Therefore the EURUSD falling below the fair value at 1.0675 might lead to a continuation of the peak towards 1.0575–1.0615. If the buyers manage to return the quotes above 1.0675, there will be a buy signal.