The euro rebounded on Thursday after briefly falling 1.5% to its lowest daily level since September 2022. Currently, EUR/USD is trading up by 0.3% to 1.0613.
The Financial markets are volatile as many fear the Silicon Valley collapse could spread to other banks. Those concerns were realized when the stock market plunged sharply.
Besides that, it was also triggered by a number of major bank stocks fell victim after Credit Suisse Group (NYSE:CS) slumped by 25%. Although the Swiss central bank has taken action to rescue Credit Suisse, the risk-off has already grown.
This situation influenced market speculation on the ECB's move. Many market participants decided to monitor while waiting and seeing the further situation.
Market Awaits ECB Verdict
Looking at the turmoil that is sweeping the market now, it is difficult to predict the decision that the ECB will take. Previously, markets predicted there was an 80% chance the ECB would raise interest rates higher than expected.
However, after the collapse of Silicon Valley Bank, markets are more confident the ECB will only raise rates by 25 bps. The ECB president, Christine Lagarde, gave a clear signal.
She has signaled clearly that the central bank will raise interest rates by up to 50 bps. If that statement is not fulfilled, the credibility of the European Central Bank could be threatened.
A pause in rate hikes seems impossible. But given the recent economic conditions, it is possible that the this institution will take this step.
Eurozone Inflation is at Around 8.50%
Currently, Eurozone inflation is quite high at 8.50%. The banking crisis may temporarily distract the ECB from that level of inflation.
However, it is undeniable that the ECB must continue to raise interest rates so that inflation can approach the 2% target. According to Kenny Fisher of MarketPulse, not a few expect ECB officials to stick to aggressive interest rate policy.
The ECB will release its latest inflation forecasts at its policy announcement later today. If later projections are revised upward, members who adhere to hawkish ideology will likely call for higher interest rate hikes.
Elsewhere, The US dollar index or DXY declined again towards the 104.00 threshold in trading on Friday. That was as market panic related to the global banking crisis receded.
Three Huge Banks Commit to maintaining the Stability
Major currency pairs are observed to strengthen rapidly. These are especially for the AUD / USD, NZD / USD, and EUR / USD.
The US Federal Reserve, the European Central Bank (ECB), and the Swiss National Bank (SNB) separately shared their commitment. They want to manage the banking stability.
They said that it will be done through the provision of additional liquidity and other policies where necessary. Their announcements contribute to the confidence of market participants.
Some banks indicated to be troubled in the United States and Europe also received timely assistance. That is why; the systemic impacts are avoided for now.
FDIC had Taken Over the SVB and Signature Bank
The Federal Deposit Insurance Corporation (FDIC) has taken over Silicon Valley Bank and Signature Bank. Eleven banks are extending for about $30 billion to "save" First Republic Bank in the America.
Credit Suisse said it would borrow up to about $54 billion from the SNB to strengthen its credibility. The news restored market confidence that had collapsed due to the Silicon Valley Bank and Credit Suisse crisis in recent days.
Sentiment is also improving following the ECB's decision to keep raising interest rates by 50 basis points yesterday. EUR/USD was in a better position at 1.0665 in today's trading.
The euro responded positively to the ECB's interest rate decision yesterday. That was although some market participants chose to "wait-and-see" ahead of the release of Eurozone inflation data today.
