SVB Collapse Spells Trouble. Will the Fed Pause the Hikes?

CPI Ahead: Here’s Why This Release Is More Important Than Ever.

The banking industry just took another hit: Silicon Valley Bank (SVB) collapsed and sent waves of fear across the finance sector. The probability of a 25-bps rate hike is now 95.2%, while the probability of a pause is 4.8%, according to CME’s FEDWATCH tool.

During his testimony last week, Fed Chair Powell’s hinted about higher rates, saying: “If — and I stress that no decision has been made on this — if the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes”. After his speech, the chances of a 50-bps rate hike were up to 42% from 26% before the testimony.

Following the recent collapse of SVB, the Fed and Treasury announced they will cover all losses incurred by SVB depositors, excluding shareholders and bondholders. The same measures will apply to depositors of New York Signature Bank, which was closed Sunday by U.S. regulators in an effort to stop the ripple effect across the banking sector.

With all these hits, it would be almost out of the question for the Fed to hike aggressively. But the question is: what would happen if the inflation numbers that come out Tuesday exceed expectations?

The NFP released last week was higher than expected, so the labor market is not cooling off, or at least not to the extent desired by the Fed. If the CPI shows that inflation is not cooling off either, the Fed will be in a tough spot. High inflation calls for tightening but the banking crisis calls for more accommodating measures. That’s why this week’s CPI will be extra important.

Key Data for the Week Ahead

The CPI and Core CPI will be released Tuesday at 12:30 pm GMT. The monthly figures are expected to come out roughly the same as the previous ones: 0.4% forecast vs. 0.5% previous for the CPI and 0.4% forecast, same as previous for the Core version. The annual CPI is expected to drop to 6.0% from the previous 6.4%.

Wednesday at 12:30 pm GMT traders will focus on the release of the U.S. Retail Sales and Core version of the indicator as well as the PPI and Core PPI.

Thursday at 1:15 pm GMT, the ECB will announce their interest rate (50-bps hike expected) and half an hour later, ECB President Lagarde will hold a press conference. The last release of the week comes Friday at 2:00 pm GMT in the form of the U.S. UoM Consumer Sentiment Survey.

Technical Outlook – EUR/USD

Monday’s session opened with a gap to the upside, which was a result of the events that took place over the weekend. The US Dollar weakened and allowed to Euro to climb above 1.0700, currently trading at 1.0725.

Gaps are usually closed, meaning that the price will eventually return to where the gap originated. However, the time it takes for the gap to close is difficult to anticipate with accuracy.

The pair is touching the 50-day Moving Average and the bulls are in control for now. A break of this barrier would likely bring in additional buyers and would trigger an extended rally.