FX.co ★ EUR/USD: they tried to defeat the dollar, but the banking system almost collapsed

The US currency started the new week relatively positive, trying to keep the delicate balance gained at the end of last week. The recent disruption in the global banking system slightly undermined the dollar's position, but the latter was able to recover. The euro is also trying to find a balance in the EUR/USD pair, showing positive values from time to time.

On Monday, March 27, the greenback slightly strengthened as investors assessed regulatory measures aimed at stabilizing the global banking system. Despite fears about a possible banking crisis, the greenback remains calm. According to analysts, the current turmoil plays into the hands of the USD, which is "fueled" by crises.

According to experts, the financial world recently went through a three-month period during which markets moved from expectations about a possible recession in the US this year to a scenario in which the US economy avoids a "hard landing". However, now the situation has turned 180 degrees, and these fears have returned. As a result, the markets again predict the onset of a recession in the United States and the weakening of the dollar. Earlier, market participants corrected their long-term forecast regarding the growth of the recession in the eurozone and revised their attitude towards the Chinese economy in the direction of its improvement.

However, severe banking stress against the backdrop of high inflation has made its own adjustments. Against this background, the major central banks had to raise interest rates again, despite the so-called "credit shock". This triggered a brief drop in the greenback, which quickly recovered from the shock. According to experts, any financial crisis is positive for the dollar, so the recovery of the latter did not come as a surprise to the markets. At the same time, it is difficult for the euro to maintain its high positions, although most often its efforts are not in vain. On the morning of Monday, March 27, the pair was trading at 1.0772, trying to maintain the upward momentum.

According to experts, during credit crises, dollar cash and liquidity rise. This is confirmed by the current situation. The US economy and stock markets also outperform during such shocks and attract foreign investment. Against this background, the demand for dollars is sharply increasing. In such an environment, the Federal Reserve is also reviewing its monetary strategy. At the moment, experts have recorded the relative readiness of the central bank to reduce interest rates and soften lending conditions for banks in order to avoid a recession.

According to analysts, it was the global banking crisis that caused serious concerns of the Fed representatives and pushed the central bank to a possible revision of the current monetary policy. This provoked a number of changes in expectations about the key rate. At the moment, market participants are afraid to factor in the key rate hike in May, but they believe that it will remain at the same level, and at the end of 2023 it will be reduced by 100 bps, up to 3.75-4.00%.

According to James Bullard, head of the St. Louis Fed, current forecasts suggest another rate hike that could occur at the next FOMC meeting. The final rate for 2023 has been raised by 25 bps, the official said, up to 5–5.75%, with the expectation that the financial stress will end. At the same time, Bullard considers the onset of a global crisis caused by the recent stress unlikely. According to him, the Fed is now keeping its finger on the pulse and is closely monitoring the situation in order to take appropriate action if necessary.

Some analysts also believe that America is not in danger of a recession anytime soon. However, many fear other unpleasant surprises, as the series of rapid interest rate hikes that the Fed has implemented over the past year is depleting cheap money and unsettling the economy. Uncertainty about the Fed's intentions is increasing investor anxiety about stocks and provoking serious fluctuations in the price of U.S. government bonds. Recall that last week, the central bank increased the interest rate by 25 bps, stressing that it is ready to pause its rate hike if the situation worsens. Earlier traders and investors invested heavily in U.S. Treasuries, raising the yield on two-year bonds to 3.76%.

Currency strategists believe that such a situation undermines the dollar's position as a safe haven currency, but will not prevent it from recovering in the near future. Some fluctuations in the USD dynamics are caused by financial stress, after which the greenback will return to normal. Experts fear a short-term decline in the EUR/USD pair to the critical level of 1.0500, while many of them have a different opinion and expect the pair to rise to 1.1200-1.1300.