It has happened! The European Central Bank did what it was supposed to do - raised the deposit rate by 50 bps to 3%, and abandoned the obligation to raise the cost of borrowing at a steady pace. Initially, investors perceived this as a dovish signal and caused the EURUSD to fall. Moreover, forecasts for consumer prices have been lowered, which suggests less room for maneuver in the field of tightening monetary policy. However, the markets were frightened by something else entirely.

In fact, the ECB is not to be envied. Cracks in the banking system appeared first in the United States, and then in Switzerland, and the markets demand explanations from the ECB. It just so happened that its meeting was the first on the calendar. At the same time, the phrase in the accompanying statement that the increased level of uncertainty reinforces the importance of a data-based approach has become bad news for EURUSD. For a long time, central banks chose between determination and caution, and the latter created a headwind for their currencies.

ECB inflation forecasts

Now the main factor of uncertainty is the banking system, and investors demanded clarifications from ECB President Christine Lagarde. It seemed that Lagarde calmed the markets with the phrase that the sector of credit institutions is much more stable than in 2008, which temporarily returned EURUSD above 1.06. Nevertheless, words that there is no compromise between price and financial stability scared investors. Will the ECB put the suppression of high inflation on the back burner and start using tools to rescue Credit Suisse and other troubled banks?

I believe that it is ready to do both, while Lagarde stressed that the ECB has even more opportunities than the Federal Reserve.

It seems that a serious discussion broke out inside the Governing Council, and it was extremely difficult for Lagarde to find a compromise. Judging by the reaction of EURUSD, not everything worked out. But it is difficult to expect anything else if investors see a direct discrepancy between the ECB's intentions to suppress inflation and stabilize the banking system.

It will be even more difficult for the Fed to do this a week later, because the main source of ignition is in the United States. Unsurprisingly, derivatives lowered expectations of a peak in the federal funds rate from 5.7% to 4.7%. This means that no one expects it to rise at the March FOMC meeting. For the deposit rate, the assumed ceiling fell from 4.2% to 3.2%, which also signals the end of the monetary tightening cycle. The situation looks very confusing, is it any wonder that EURUSD is wobbling from side to side?

From a technical perspective, the pair's ability to cling to the lower limit of the fair value range of 1.0575-1.0715 is crucial. If it succeeds, chances of rising to 1.0665 and 1.0715 will increase significantly. As well as completing the correction and heading for an uptrend. Otherwise, the rollback will continue.