A member of the European Central Bank (ECB)’s governing council, Pierre Wunsch, emphasized the need for the ECB to persist with its rate-hiking efforts and simultaneously reduce its colossal 3.2 trillion-euro balance sheet.
Wunsch stated that a 50 basis point hike could be considered if core inflation exceeds expectations and positive data is obtained from the ECB’s quarterly lending survey.
With a growing sense of stability in the banking sectors of the EU and the US, the focus has now shifted to the willingness of banks to extend credit in a period of rising interest rates and market instability.
The EUR/USD pair has breached the previously identified 1.1000 level and is now trading above the yearly high of 1.1033. The uptrend can be attributed to the interest rate differential between the German 10-year bund yield and the US 10-year treasury yield.
The euro is continuing to gain support from the widening differential, while the expectation of US rate cuts in the second half of the year and US disinflation are contributing to the decline of the US dollar.
The next level of resistance for EUR/USD is the 61.8% Fibonacci level of 1.1205, followed by the zone of resistance at 1.1500. However, the looming threat of declining earnings growth ahead of the US earnings season may provide support for the safe-haven US dollar as recession fears resurface.
Investors should keep an eye out for mentions of ‘recession’ in earnings statements, particularly as the minutes of the March Fed meeting suggest a potential recession towards the end of the year. Support for EUR/USD lies at the prior high of 1.1033 before 1.0767.
The US bank earnings season has begun, with credit loss provisions being a significant item of interest. If banks anticipate an increase in defaults and become more pessimistic, this figure will rise. In addition, the March inflation data for the euro area, which is predicted to show another rise, is set to be released next week.
This could be problematic, as the ECB had forecasted core inflation to hover around 5% before dropping, and a print of 5.7% for March could be seen. If the consensus holds, it could be favorable for the current EUR/USD trend.
