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  • Weekly Focus: Prices in the U.S., ECB Meeting, and Banking Quake

Weekly Focus: Prices in the U.S., ECB Meeting, and Banking Quake

The mad weekend, which left markets handing from the edge of the banking crisis in the United States, ended on Monday with an optimistic note when the Federal Reserve (Fed) and the U.S. Ministry of Finance announced the availability of direct loans to banks under the Federal Deposit Insurance Act to cover uninsured deposits at Silicon Valley Bank (SVB) and Signature Bank (SB) that collapsed last week. The Fed and Federal Deposit Insurance Corporation (FDIC) said they will cover deposits under $250,000, which is a maximum limit per authorized deposit, and other accounts.

This is a very unexpected generous act for the United States, which may reveal that the troubles of SVB and SB are only the top of the iceberg. The collapse of these two important banks in California has put the American banking system under major stress which was lastly felt during the fallout of the Lehman Brother collapse in 2008 and which lead to the Great Financial Crisis in 2008-2009. Investors are expecting the economic turmoil to reach almost the same magnitude this time. So, the collapse of SVB and SB made investors shiver as it has many similarities to the Lehman Brothers case. When the Fed and FDIC announced unprecedented actions to cover authorised deposits, investors gave out a sigh of relief. They also revised their expectations of the Fed’s actions. They now expect the Fed will only raise its interest rates by 0.25 percentage points to the rounded 5.0% instead of 0.50 p.p. previously expected . Goldman Sachs is no longer expecting an interest rate hike in March despite very hawkish statement from the Fed’s frontman, Jerome Powell, during his testimony to Congress last week.

So, it will be vital to monitor U.S. inflation figures that will be released on Tuesday. Will the Fed swallow its pride and allow inflation to run high while considering the risks of elevated interest rates for the national banking system even in a slowdown of inflation, that would be less than the expected 6.0% year-on-year for February.

This may seem like a paradox, but the only solution for the Fed now is a collapse of the stock market which will shockingly bring down inflation to allow the monetary watchdog to pause interest rate hikes, or even reverse them. Further increases of interest rates will likely suppress the American banking system. So, we may expect stocks to collapse within the nearest two weeks.

Technically, the S&P 500 index continues to move within a downside formation with targets at 3650-3750 points. The index is below the strong support level of 3970-3990. This opens the window for a steep decline towards 3650-3750 points and below.

Oil market prices dropped significantly to the low margin of the wide trading range of $79-89 per barrel of the Brent crude benchmark. This time prices are ready to go deep down once they breakthrough the support level of $79 per barrel. Recession logic suggests that prices may decline towards $40-60 per barrel.

Gold prices are moving inside the mid-term, upside formation with targets at $2000-2100 per troy ounce by the middle of 2023. Prices jumped to the resistance level of $1890-1900 per ounce amid shocking quake in the U.S. banking system. If prices fail to go above $1900 per ounce this week, a new testing of the support at $1790-1810 per ounce will be possible. If this level is crossed, prices may rewrite last year’s lows of $1600-1650 per ounce.

The U.S. Dollar is likely to continue strengthening, but it will largely depend on incoming inflation data. Considering high volatility in the market, it is better to place orders attached to longer perspectives. Short trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000 points below the opening level and the same 5000 points for a stop-loss order should be considered attractive. The decline of the EURUSD to 1.05000-1.05500 could be used to close half of the trade, and the other half should be continued until the targets of 1.03000-1.03500 are met.