ECB Hike: 0.25% or 0.50% Debate after Credit Suisse Crisis

At the beginning of the week, we discussed a domino effect in the banking sector. No more dominos have officially fallen, but another is on shaky grounds. This week 3 US banks have collapsed, sparking concern over the global banking sector, but this time it's Europe’s turn. Concern has been sparked by a shareholder of Credit Suisse about “material weaknesses” it has witnessed in the company’s financial reports. The shareholder is the Saudi National Bank, advising that the commercial bank will not be able to increase its stake. 

In total, the bank’s shares have declined by 35% over the past five trading days, but most economists have advised the bank has had financial issues for almost five years and is not a similar problem to the SVB and Signature bank collapse. The bank has now also been given 50 billion Swiss Franc from the Swiss National Bank as a lifeline. Nonetheless, investor sentiment across the financial trading market has significantly declined, and traders are treading cautiously. 

Safe Haven Drive 

The market experienced the most vigorous demand increase for safe-haven assets during yesterday’s European Trading Session. Investors experienced a rare occurrence where both the US Dollar and the Gold increased in value. The US Dollar Index had risen from 103.50 to 105.10, which is also its most substantial bullish run so far this year. The price of Gold also climbed by 2.75%. However, both have retraced downward as panic seems to be dying. The stock for Credit Suisse is also close to returning to previous levels. 

European Central Bank’s Rate Decision: 0.25% or 0.50%?

Over the past two weeks, markets have priced in a concrete 50 basis point hike, but the European Central Banks' plan to hike has been questioned. Due to the uncertainty, the Euro is expected to experience high volatility as the ECB confirms its rate decision. Some economists are advising the central bank will hike 25 basis points while others are leaning towards 50 basis points.  The chances are that the ECB will still hike 50 basis points as Europe’s main refinancing rate is much lower than their American competitors. In addition to this, European inflation is significantly higher than in the States.

EUR/GBP 2-Hour Chart on March 16th 

EUR/USD -  ECB in Focus

As mentioned above, today's exchange rate will be primarily influenced by the European Central Bank’s rate decision this afternoon. Many economists believe their decision will remain the same, but their forward guidance may be less hawkish than they previously were. The EUR/USD significantly declined during yesterday’s trading session, but the price action was unrelated to the Dollar. Yes, the US Dollar increased against all competitors, but the Euro also declined against the Pound and Yen. 

So far, technical analysis is pointing towards a price correction that may mean a further 0.50% increase. Most moving averages on 1-Hour timeframes and below point towards an upward price movement. However, the regression channel also signals the price may find resistance at 1.06360. Even though technical analysis is critical, traders should note that the exchange rate will primarily be driven by the ECB’s rate decision and forward guidance. 

EUR/USD 30-Minute Chart on March 16th

The market will also be monitoring comments from Federal Open Market Committee members regarding the Fed’s rate decisions. The Federal Reserve is still committed to a restrictive policy to drive inflation further down, specifically the core inflation figures. However, they will take a restrictive policy's risk more seriously. Therefore most analysts are leaning towards a 25 basis point hike. 

Dow Jones

The Dow Jones also reacted to the change in the market’s risk profile which quickly went from “shaky” to low-risk appetite and “panic”. The Dow Jones again saw the strongest bearish price movement, as indicated throughout the past two week’s market analysis blogs. The price declined to $31,422, the lowest price since October 25th. As the price renewed its recent lows, the asset quickly became oversold, and investors took advantage of the discounted price. 

By the end of the trading session, the price declined by 0.88%, much higher than the daily lows. Most economists advise that investors may experience short-term bullish trends, but their medium to longer-term outlook still points towards potential pressure on the stock market. Specifically, while no rate cuts are on the horizon and if the banking sectors continue to signal weakness. 

Look at our latest technical analysis video, where NAGA’s educator, Jacques Nel, explores the signals the charts provide.

Dow Jones (US30) Technical Analysis Video on March 16th

Summary:

• The spotlight remains on the banking sector as a shareholder of Credit Suisse reports “material weaknesses” it has witnessed in its financial reports.
• Stocks of Credit Suisse collapse and the Swiss National Bank hand the commercial bank a credit lifeline. 
• Safe-haven assets increase in demand with both the US Dollar and Gold increasing in value. 
• Investors contemplate whether the ECB will opt for 25 or 50 basis points. 
• Pressure on the stock market is expected to remain while interest rate cuts are not an option.