EUR/USD Levitates Above Key Support Following Rate Hike From ECB

Talking Points:

• The EUR/USD exchange rate crept higher overnight following the ECB’s decision to hike rates by 50-basis points.

• The lack of systemic risk to the European banking sector may keep the Euro well-bid against its major peers in the short-term.

The EUR/USD exchange rate crept marginally higher overnight following the European Central Bank’s decision to hike interest rates by 50-basis points, as investors remain focused on ongoing turbulence in the US and European banking sectors. Coming into yesterday’s monetary policy meeting there were doubts as to whether President Christine Lagarde and her colleagues at the ECB would follow through with preordained plans to increase its benchmark interest rate by half a percentage point. After all, the Federal Reserve just announced that it would make available additional funding to “eligible depository institutions” through its new Bank Term Funding Program (BTFP) to avoid any similar collapses like the one seen at Silicon Valley Bank over the past week whilst turmoil at Credit Suisse led many investors to believe that the ECB would back off its planned hike. The firm’s shares sold-off dramatically on Wednesday after the Saudi National Bank – which owns just shy of 10% of Credit Suisse – would not buy more shares due to regulatory issues.

Credit Suisse Shares Plunge Following Collapse of Silicon Valley Bank

This forced Credit Suisse to announce that it is “taking decisive action to pre-emptively strengthen its liquidity by intending to exercise its option to borrow from the Swiss National Bank up to CHF50 billion under a Covered Loan Facility as well as a short-term liquidity facility, which are fully collateralised by high quality assets”. It is yet to be seen if this will fully assuage investors’ concerns. However, a systemic issue within the European banking sector remains an unlikely scenario given the strong underlying fundamentals of many institutions, with depository institutions in the trading block having an average liquidity cover ratio of 165%. This is far higher than in the United States, with banks averaging a LCR of 118%. With that in mind, the ECB may continue along its tightening path over the coming months, keeping the Euro well-bid against its major peers.

EUR/USD Daily Price Chart – September Uptrend Remains Intact

From a technical perspective, although the EUR/USD exchange rate has declined steadily since the start of February, the longer-term outlook remains constructive as prices continue to track the uptrend extending from the September 2022 lows.

With key support at 1.0500 holding firm, the path of least resistance still appears skewed to the upside.

Ultimately, a daily close above the March 15 high (1.0760) is needed to validate bullish potential and carve a path for price to retest the yearly highs.

On the other hand, if support gives way a swift move back towards parity can’t be ruled out.

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