Signal ahead of the ECB rate decision

The EUR/USD price crawled back slightly as investors positioned for the upcoming interest rate decision by the European Central Bank (ECB). The pair also rose slightly as traders assessed the impact of the new Credit Suisse bailout. It was trading at 1.0612, which was slightly above this week’s low of 1.0522.

ECB decision preview

The ECB committee will conclude its two-day meeting on Thursday. This will be a closely-watched meeting because of the ongoing state of the financial market where risks have remained at an elevated level, 

Most of these risks started last week when two American banks – Silicon Valley Bank and Signature – failed. The Federal Reserve and the FDIC had to bailout uninsured depositors of the two banks. Regional bank stocks have retreated sharply in the past few days.

The banking crisis escalated on Wednesday when the Saudi National Bank warned that it will not provide additional liquidity to Credit Suisse. As a result, most European bank stocks were halted as their shares plunged. 

Therefore, the ECB will have to balance the need to fight the elevated inflation with that of financial stability, as we wrote here. To do that, my crystal ball tells me that the bank will hike interest rates by 0.25%, which is lower than what it had guided before. In a note, analysts at ING wrote:

“The risk of miscommunication is high at this meeting; our call for one last spike in rates before the end of this cycle is now conditional.”

The ECB will be a minimal catalyst for the EUR/USD pair. Instead, the biggest mover will be next week’s actions by the Federal Reserve and the overall risk sentiment in the market. Elevated market risk will push investors to the safety of the US dollar.

EUR/USD forecast

EUR/USD chart by TradingView

The EUR to USD pair drifted upwards slightly in the Asian session after the Credit Suisse bailout. This recovery happened after the pair formed a morning star pattern on the 4H chart. The lower side of this star was at 1.0522, which was the lowest point on March 8. 

The 25-day and 50-day moving averages have made a bearish crossover pattern while the MACD has moved below the neutral point. Therefore, the pair will likely resume the bearish trend into or after the ECB decision as sellers target the next support at 1.0450.