FX.co ★ EUR/USD. The results of the "hot" week: Powell, Nonfarm and the collapse of Silicon Valley Bank

The euro-dollar pair ended the trading week at 1.0643, which is not far from the opening level (1.0625). Abstracting from the intra-week volatility, one can come to the obvious conclusion that traders have not been able to decide on the vector of the pair's movement – the opening price of the week practically coincides with the closing price. Over the past five days, market participants have tried to push the pair to the downside (weekly low at 1.0525) and to the upside (weekly high at 1.0701). But neither the bulls nor the bears were able to hold steady at the highs/lows reached. As a result, traders went to the corners of the ring with a score of 1:1. The bulls stopped the downward momentum, while the bears kept the pair within the 6th figure. Obviously, next week the fight will resume.

Jerome Powell and Nonfarm: the controversy game

The past week has been a busy one. Early on, Federal Reserve Chairman Jerome Powell surprised the markets with his ultra-hawkish stance: speaking in the Senate, he actually announced an acceleration in the pace of the rate hike and allowed the final rate to be revised upward. However, the next day, speaking in the House of Representatives, Powell softened his wording, saying that the central bank had not yet made any decision on the March meeting. According to him, much will depend on the incoming data. Amid Powell's softening rhetoric, the pair's downward momentum actually faded away, and the bulls seized the initiative, who returned the price to the area of the 6th figure.

February Nonfarm, which was published on Friday, also added fuel to the fire. After a three-month decline, unemployment in America rose again to 3.6%, while most experts expected to see this indicator at the January level (3.4%). In addition, the salary indicator was also in the "red". Although we can't say that the Nonfarm was a complete failure - for example, the number of employed increased by 311,000 with a forecast of growth of 205,000. But traders considered this data in regards to the Fed's possible actions. The controversial report made market participants doubt that the Fed would really resort to more aggressive steps (i.e., return to the 50-point rate hike rate). Before the release of the Nonfarm, the probability of a 50-point rate hike at the end of the March meeting was almost 80% (according to the CME FedWatch Tool). After the release of the report, this probability decreased to 64%. The dollar plunged even more sharply throughout the market, also against the euro.

The collapse of Silicon Valley Bank

Another fundamental factor also exerted pressure on the greenback. We found out that Silicon Valley Bank went bankrupt in the United States, which at the end of 2022 was the 16th in the country in terms of assets and focused on working with startups.

According to Bloomberg, the bank received tens of billions of dollars from its venture clients and invested this money in long-term government bonds, the prices of which have fallen sharply over the past 12 months due to the Fed raising the discount rate. SVB management tried to hold an additional issue of shares, but an insider leaked to the press provoked panic among depositors: in just a day, customers took $42 billion from it, and the shares collapsed by almost 70%. And although the US Treasury Department said that the situation is under control, unpleasant analogies with 2008 alarmed traders of the foreign exchange market. The collapse of Silver Valley Bank was the largest in the last 15 years, when Washington Mutual bank became a victim of the financial crisis (its assets amounted to $300 billion, SVB – more than 200 billion).

In general, the current situation should be assessed in two aspects. The first aspect concerns the general confidence of Americans in the reliability of the national banking system and in the availability of all necessary tools by the relevant regulators to maintain its stability. According to a number of experts, the SVB case will not provoke a "domino effect" and will not have a strong impact on the financial system (similar to Lehman), because this bank is quite isolated. By the way, Finance Minister Janet Yellen discussed the situation with representatives of the Fed and the Federal Deposit Insurance Corporation. Following the meeting, she expressed confidence in the reliability of the American banking system. In her opinion, the incident with SVB is not a sign of deeper problems in the US banking industry.

But there is another aspect of the current situation, which is more "local" in nature. According to a number of analysts, the collapse of Silver Valley Bank will affect the determination of Fed members, as other large banks may have similar gaps in the balance sheet. According to The Wall Street Journal, the market value of the four largest US banks decreased by approximately $52 billion last week. In particular, the shares of Bank of America fell by 6.2%, Wells Fargo by 6.5%, JPMorgan Chase by 5.4%, Citigroup by 4.1%.

According to the CME FedWatch Tool, even before the aforementioned events, the market was not sure that the Fed would really decide to accelerate the pace of rate hikes to 50 points. The situation with SVB to some extent tipped the scales towards a more cautious, 25-point approach. According to supporters of the moderate scenario, an aggressive increase in the Fed's interest rate will lead to an increase in the number of defaults.

In my opinion, it is still premature to draw such conclusions, but in general, the market's wariness about the Fed's further decisions is quite justified – especially in light of Powell's "soft clarifications" and the contradictory Nonfarm.

Conclusions

The motley fundamental background of EUR/USD did not allow both bulls and bears to gain an advantage. Most likely, the pair will trade flat before the release of key macro data next week: on Tuesday, March 14, the US will publish the February Consumer Price Index. This will decide the fate of the greenback in the medium term – it will either strengthen the dollar's position (returning the EUR/USD pair to the area of the 5th figure), or further weaken it (allowing bulls to enter and hold steady above the 1.0700 mark).

Therefore, it is better to maintain a wait-and-see stance before the release of the CPI data.