EUR/USD Falls as Investors Adjust Bets on ECB Rate Hike

Key Takeaways

• Investors changed their bets on rate hikes by the ECB amid global banking turmoil
• Markets now pricing in a 60% chance of a 25 basis point hike in Euro Zone rates on Thursday
• Earlier in the day, they were pricing in a 90% chance of a 50 basis point hike

Overview

The Euro is down sharply at the mid-session on Wednesday as investors changed their bets on rate hikes by the European Central Bank (ECB) amid global banking turmoil. Markets are now pricing in a 60% chance of a 25 basis point hike in Euro Zone rates on Thursday. Earlier in the day, they were pricing in a 90% chance of a 50 basis point hike.

At 17:30 GMT, the EUR/USD is trading 1.0554, down 0.0179 or -1.67%. The Invesco CurrencyShares Euro Trust ETF (FXE) is at $97.39, down $1.74 or -1.75%.

Credit Suisse “Weakness” Sparks Global Crisis Fears, Euro Falls

The Euro plunged as investors flocked to the U.S. Dollar on safe-haven buying after Credit Suisse’s stock tumbled following the disclosure of “weakness” in its financial reporting that renewed investor concerns that a full-blown global banking crisis may be brewing.

The single-currency plummeted against the greenback after Credit Suisse shares dropped 15.6% after its biggest investor, citing regulatory issues about the size of its holding , said it was unable to increase its stake.

Swiss Bank Concerns Spark Bond Yield Decline and Rate Cut Expectations

Concerns about the Swiss bank led the European banking index to fall 6.12%, its biggest one-day drop in more than a year, and triggered a sharp decline in European and U.S. bond yields as investors questioned if the Federal Reserve and other central banks can keep hiking interest rates to curb inflation.

Fed fund futures, which reflect the overnight rate that banks use to lend to each other, plummeted. The December contract tumbled to 3.62% in a sign markets expect the Fed to be cutting interest rates by year’s end, if not before.

Two-year Treasury notes, which move in step with interest rate expectations, slid 42.5 basis points to 3.800%, while the likelihood the Fed does not raise rates at its policy meeting on March 21-22 rose to about 50%, CME’s FedWatch Tool showed.

Markets are pricing in a 50% chance of no change and a 50% chance of a 25 basis point increase from the U.S. Federal Reserve next week.

Daily EUR/USD Technical Analysis

The main trend is down according to the daily swing chart. The trend turned down earlier in the session when sellers took out 1.0524. A trade through 1.0760 will change the main trend to up.

The nearest support is the Jan.6 bottom at 1.0483. It is followed by a long-term 50% level at 1.0381. The closest resistance is a pair of 50% levels at 1.0639 and 1.0661.

Daily EUR/USD Technical Forecast

Trader reaction to the pair of 50% levels at 1.0639 and 1.0661 are likely to determine the near-term direction of the EUR/USD.

Bearish Scenario

A sustained move under 1.0639 will indicate the presence of sellers. The selling could accelerate on a trade through 1.0483 and especially if it turns lower for the session. The primary downside target this week is the long-term 50% level at 1.0381.

Bullish Scenario

A sustained move over a long-term 50% level at 1.0661 will signal the presence of buyers. If this creates enough upside momentum then look for a surge into the resistance cluster at 1.0760 – 1.0775.