The more choices there are, the harder it is to choose. Until now, investors have considered two options: the Fed raises the federal funds rate in May and holds it until the end of 2023, or makes a "dovish" pivot. But what if the Central Bank takes a pause at the next meeting and tightens monetary policy in June? Evercore sees such a scenario as possible, while MUFG claims that the need to raise borrowing costs to 5.25% is diminishing every day. The cause is the banking crisis and recession.

According to two out of three Bloomberg experts, a downturn in the U.S. economy over the next 12 months is inevitable. Many specialists believe that the Fed underestimates the impact of reduced bank lending on the American economy. According to Jerome Powell, it is equivalent to a 25 bps increase in the federal funds rate; however, 43% of respondents think it is 50 bps, and 13% says 75–150 bps.

Recession forecasts in the U.S. economy

Despite the Fed's assurances that the banking system is stable, First Republic's corporate reports, another bankruptcy candidate, suggest otherwise. Banks that have invested huge sums in Treasury bonds now regret it. The rapid rise in bond yields amid the highest inflation in decades and the aggressive monetary tightening by the Fed has led to a significant decline in asset values. At the same time, encouraged by the high efficiency of investments in money market funds, depositors withdrew deposits. To stop their outflow, it was necessary to raise rates, which sharply reduced profits.

Both the sinking SVB and the struggling First Republic faced this problem. It is much broader than generally believed. It's no surprise that Bloomberg experts estimate the impact of reduced bank lending on the U.S. economy to be greater than the Fed's assessment.

Assessing the impact of reduced lending on the U.S. economy

Adding First Republic's difficulties to disappointing consumer confidence statistics and durable goods orders makes it clear why investors are talking about a recession. At the same time, the optimism of ECB Vice President Luis de Guindos, who asserts that there will be no downturn in the Eurozone economy, along with the German government raising GDP forecasts for 2023 to 0.4%, creates a contrast and contributes to the EURUSD rally.

The U.S. gross domestic product did not help the dollar either. In the first quarter, it grew by a modest 1.1%, falling short of Bloomberg experts' forecasts of 2%. However, the pill was sweetened for the American currency by the acceleration of the GDP deflator to 4% and the decline in the number of jobless claims.

Technically, on the daily chart of EURUSD, an Anti-Turtles pattern may form. The euro should be sold if quotes fall below the fair value at $1.0975. However, the inability of the bears to push the pair below 1.011 is a sign of their weakness and a reason for buying.