The collapse of the 16th largest U.S. lender is a wild card that could change the rules of the game in the macro environment for the coming quarters. Markets are signaling that the Fed and other central banks have either already reached or are very close to the limit in raising borrowing costs. Expectations for the ceiling on the federal funds rate returned to 5%, although a week ago, they were 5.75%. The same is true for the ECB deposit rate, with derivatives seeing it peak at 3.5%, 50 bps lower than in early spring. However, the fall of EURUSD suggests a different scenario for the development of events.

If the Fed and other U.S. regulators succeeded in calming the financial markets and stabilizing the banking system, the SVB failure will remain a blob on the white paper of the U.S. economy that everyone will quickly forget about. Investors will immediately remember that employment in the U.S. was a pleasant surprise in February, rising by 311,000, while core inflation accelerated to 0.5% MoM. So, it's too early to sell the dollar unless the ECB forces it to do so.

In fact, the European Central Bank certainly has grounds. The revision of French inflation showed its higher record of 7.3%, and the impact of the SVB failure on the eurozone banking system is limited due to its smaller ties with the technology sector than in the United States.

Dynamics of French inflation

On the other hand, gas prices in the eurozone are down 90% from their summer peaks, and previous monetary tightening is making itself felt in the form of slower credit growth, which will affect both inflation and GDP. The Governing Council's centrists have a strong case for sticking to the position of changing the rate from meeting to meeting depending on the data, while the ECB has a strong case for lowering its inflation forecasts.

In December, the central bank saw consumer prices at 6.3% in 2023, 3.4% in 2024 and 2.3% in 2025, which suggested further monetary tightening. If estimates are lowered, as Bloomberg experts suggest, the deposit rate ceiling will be much closer than the futures market indicates.

European Inflation Forecasts

Expectations that the ECB will lower its inflation forecast, coupled with concerns about Christine Lagarde's cautious rhetoric at a press conference following the meeting on March 15, put pressure on EURUSD. The European Central Bank is unlikely to reject the 50 bps increase in the cost of borrowing, but it is already taken into account in euro quotes. Another thing is that a direct indication of how much and when the rates should grow further will be replaced with vague wording.

Technically, the inability of EURUSD to cling to the upper limit of the 1.0565–1.0725 range and the return to fair value are signs of weakness of the bulls. It looks like their attack is running out of steam, and a breakout of support at 1.0675 may become the basis for short-term selling. On the contrary, a rebound from this level followed by a successful assault on resistance at 1.0725 is a reason to open longs.