ECB to deliver interest rate decision amidst unfolding Banking crisis

The USD was on the rise against its counterparts yesterday maybe with one exception being the JPY which tended to enjoy more safe-haven inflows than the greenback given the developing banking crisis. It should be noted that the USD gained despite the retail sales growth rate for February contracting more than expected, indicating a relative unwillingness or inability on behalf of the average US consumer to actually spend more in the US economy. The fact that the USD strengthened despite the contracting retail sales growth rate was indicative of how the markets were justifiably more focused on the developing banking sector crisis and especially Credit Suisse. It should be noted that Credit Suisse’s share price dropped more than 25% yesterday, yet other European banks such as Deutsche Bank and UBS were also under substantial pressure yesterday, yet there seem to be some signs of stabilisation today. Given the assistance provided by the Swiss National Bank to Credit Suisse on more than $54 billion the company may be allowed to survive and markets may be allowed to calm down somewhat while European banks slip away from the worst outcome, yet there is still wide uncertainty on how the situation will develop. As the banking crisis unfolds in Europe, ECB has to deliver an interest rate decision later today and the expectations of the market seem to be divided.

It’s characteristic that EUR OIS imply currently a probability of a 25-basis points rate hike of almost 53% while the rest imply that a 50-basis points rate hike is also possible highlighting the split in market expectations. It should be noted that the bank in its prior meeting had strongly signaled the possibility of a 50-basis points rate hike in today’s meeting, given its determination to curb inflationary pressures in the Eurozone and the market had strongly priced in such a scenario up until last week. The acceleration of the HICP rate in major economies of the Eurozone such as Germany, France and Spain as February’s preliminary release showed, highlights the fact that inflationary pressures are still strong in the Eurozone and seem to be forcing the bank’s arm to actually proceed with a 50-basis points rate hike. On the other hand, given the wide uncertainty created by the unfolding banking crisis in Europe, the bank may opt to proceed with a narrower rate hike, this time of 25 basis points. In both scenarios though we expect the bank to alter its forward guidance by easing its hawkishness somewhat given the wide uncertainty in the financial environment that could weaken the EUR. Also please note ECB President Lagarde’s press conference later on which could extend volatility for EUR pairs beyond the time of the release.      

EUR/USD marked a wide drop yesterday yet seemed to bounce on the 1.0530 (S1) level. We tend to maintain a bias for a sideways motion of the pair given its inability to break below the S1 but also due to the fact that the majority of the price-action remains confined between the S1 and the R1 since the 16^th of February yet today’s ECB interest rate decision may alter the pair’s direction. Should the bulls take over we may see EUR/USD breaking the 1.0695 (R1) resistance line and aim for the 1.0855 (R2) resistance level. Should the bears take over, we may see EUR/USD breaking the 1.0530 (S1) support line and aim for the 1.0430 (S2) support level. USD/CHF rallied yesterday breaking the 0.9160 (S2) and the 0.9260 (S1) resistance lines, both now turned to support, and hit a ceiling at the 0.9340 (R1) resistance line. We expect the pair to correct lower today which could enhance bearish tendencies for the pair. Should an intense selling interest be expressed by the market, we may see the pair breaking the 0.9260 (S1) support line and aim for the 0.9160 (S2) level. Should though the banking crisis deepen allowing for buyers to control USD/CHF’s direction, we may see the pair rising further by breaking the 0.9340 (R1) resistance line and aim for the 0.9440 (R2) resistance level.    

Other highlights for the day:

Today in the European session, we note the release of Norway’s GDP rate for January while in the American session, we note the release of the US building permits and housing starts for February as well as the weekly initial jobless claims figure and the Philly Fed Business index for March. It’s expected to be a more easygoing Asian session tomorrow as no major financial releases are expected.   

EUR/USD H4 Chart

Support: 1.0530 (S1), 1.0430 (S2), 1.0290 (S3)

Resistance: 1.0695 (R1), 1.0855 (R2), 1.1000 (R3)

USD/CHF H4 Chart

Support: 0.9260 (S1), 0.9160 (S2), 0.9070 (S3)

Resistance: 0.9340 (R1), 0.9440 (R2), 0.9540 (R3)

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