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EUR/USD: Risk of Range Break in Wake of Fed
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EUR/USD: Risk of Range Break in Wake of Fed
Mar 22, 2024 2:18 AM

EUR/USD confined by key averages at 1.0575 & 1.0725May have scope to rise ahead of close-call Fed decisionIf markets welcome central bank support of banking firmsRisk of range break to up or downside post-Fed decision

Commerzbank HQ looms over the Frankfurt skyline.

The Euro to Dollar exchange rate has spent six weeks consolidating within a narrow range but could attempt a breakout to the up or downside following this Wednesday's Federal Reserve interest rate decision and forecast update.

Europe's single currency was sold widely at times last week after the fallout from recent bank failures in the U.S. led to market speculation about the viability of some lenders on the continent and a bonfire of European banking shares that has since culminated in a takeover of Credit Suisse by UBS.

"I welcome the swift action and the decisions taken by the Swiss authorities. They are instrumental for restoring orderly market conditions and ensuring financial stability," European Central Bank (ECB) President Christine Lagarde said in a statement on Monday.

Details of the merger were followed on Sunday by the announcement of coordinated action among major central banks aimed at improving the availability of U.S. Dollars in the global financial system, which might yet benefit the Euro-to-Dollar rate early in the new week.

Above: Euro to Dollar rate shown at 2-hour intervals alongside GBP/USD. Click image for closer inspection.

"Usually, this step should be USD negative. The experience of 2008 has shown us that a shortage of $ liquidity outside the US can lead to strong USD appreciation," says Ulrich Leuchtmann, head of FX research at Commerzbank.

Markets have worried about the stability of small and medium-sized banks as well as some larger firms due to the high cost of paying increased interest on depositor balances at a time when profits are still being earned from low-interest loans advanced over the last decade or more.

These costs were widely reported as contributors to the recent failures of Silicon Valley Bank and others, although the facilities provided by central banks since then have already gone some way toward addressing the risks around this.

"The Swiss decision on Sunday to deal with Credit Suisse in one fell swoop highlights the fast and largely sensible policy responses on both sides of the Atlantic. We do not expect the authorities to mishandle the risks badly in the foreseeable future," says Holger Schmieding, chief economist at Berenberg.

Above: Euro to Dollar rate shown at daily intervals with selected moving averages indicating prospective technical support and resistance while Fibonacci retracements of November rally indicate technical support for the single currency. Click image for closer inspection. To optimise the timing of international payments you could consider setting a free FX rate alert here.

The Euro was bruised last week even after financial markets made sharp downward revisions to their expectations for the Federal Reserve interest rates ahead of this Wednesday's decision, weighing on the Dollar in the process.

This could mean the Euro would benefit more than other currencies if global markets stabilise over the coming days, although much is also likely to depend on the decision and new forecasts announced by the Fed, as well as any remarks from European Central Bank (ECB) policymakers.

"I expect this week to be a challenging one for the USD. The ultimate peak in Fed Funds will probably be lower than it would have been in the absence of financial stress," says Stephen Gallo, an FX strategist at BMO Capital Markets.

"I'm expecting the USD to attempt a run at its late-February/early-March lows in BBDXY terms, but I am wary about getting short of the USD in that area," Gallo writes in Monday market commentary.

Above: Expected level of Fed Funds interest rate implied by Federal Funds rate futures. Click image for closer inspection.

The Euro would be vulnerable and at risk of sharp losses if the Fed raises its interest rate in line with the economist consensus, which envisages an increase to 5% on Wednesday, but would potentially benefit from any decision to leave borrowing costs unchanged.

Similarly, any suggestion of further increases in ECB interest rates from Governing Council members attending the bank's ECB Watchers conference this week might also help put the Euro-Dollar pair onto a firmer footing after last week's policy decision left the single currency struggling for traction.

The ECB went ahead with a fourth half percentage point increase in all of its interest rates last week but dropped its guidance about the outlook for borrowing costs during the months ahead in favour a stance determined by economic data emerging on a meeting-by-meeting basis.

"EUR/USD has downside support at 1.0360 (50% Fibbo). A raft of ECB officials will speak. However, we do not expect much forward guidance on interest rates given the uncertainties facing financial markets at present," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.

Above: Financial model-derived estimates of probable trading ranges for selected currency pairs this week. Source Pound Sterling Live. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

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