The markets are acting as if the banking crisis is over. They enthusiastically welcomed the acquisition of Credit Suisse by its rival UBS and the bailout of big lenders to the struggling First Republic Bank. Safe-haven assets in the form of the Japanese yen and gold fell out of favor, while European currencies, on the contrary, went up. EURUSD approached 1.08 within arm's length. Risk appetite is improving, so why hide in safe-haven assets? However, history suggests that it is easy to make mistakes.

A week after the collapse of Lehman Brothers in September 2008, U.S. stock indices were trading in the green zone, but this was not a reliable indicator. After that, the S&P 500 plummeted 46% and bottomed out six months later. Of course, there are huge differences between the events of 15 years ago and the current situation. The big banks are more resilient, with larger capital reserves that allow them to attract deposits. Households and companies are better off because of unprecedented support during the pandemic. There is no bubble in the housing market because of complex and extremely fragile financial instruments. Nevertheless, are investors too quick to forget about SVB and other banks? Aren't U.S. Treasury bond yields recovering too quickly?

U.S. bond yield dynamics

The stabilization of the banking system allows the Fed to return to the topic of fighting the highest inflation in 10 years. Chances of a 25 bps increase in the federal funds rate at the FOMC meeting on March 21–22 soared from 60% two days ago to over 80%. At the same time, Citi expects the Federal Open Market Committee to raise its peak borrowing cost forecast from 5%–5.25% to 5.25%–5.5%, which is bullish for the U.S. dollar. Nevertheless, the USD is growing only against safe-haven currencies. EURUSD, on the contrary, continues to go up.

Euro fans are not confused by the first decline in investor sentiment in Germany in 6 months. They are scared not only by inflation, but also by the banking crisis. But it seems that the shock has been left behind, so next month, the indicator will have an opportunity to recoup.

Dynamics of investor sentiment in Germany

So why is EURUSD rising? This is due not only in improving global risk appetite and rally expectations in the U.S. stock market, but also in the return of the theme of a more aggressive ECB compared to the Fed. Yes, Christine Lagarde hinted at an end to monetary restrictions if the banking crisis worsens, but the situation seems to have stabilized. So why don't the markets raise the peak deposit rate forecast again from the current 3.2% to the previous 4.2%? The growth of the indicator will bring support to the fans of the euro.

Technically, the exit of EURUSD from the fair value range and the successful assault on the 1.0715 pivot point indicate the seriousness of the bulls' intentions. Fortunately, we managed to form longs at attractive prices. Now we have to increase them and wait for the targets at 1.089 and 1.103 to be realized.