Expecting a Dovish FED With US Banking Hit Harder Than Europe

It seems that the bank crisis might be over, with risk assets and particularly the Euro being bullish for five consecutive days, especially this week. Analysts are analyzing the situation and argues that the US may be hit harder than Europe in terms of fallout from the banking crisis. This is indicated by several factors, such as the fact that American banks shares have been lagging behind European counterparts recently, and the increase in funding costs has been more pronounced in the US.

Besides that, bank credit risk in the US continues to be significantly higher than in Europe, where senior bank credit risk has almost entirely reversed its prior decline. On top of that, banking deposits in the US were already experiencing a sharp downturn before the recent shock, whereas European bank deposits have remained relatively stable. All of these factors suggest that the disturbance in the US financial sector is more widespread and deep-rooted than in Europe and in fact it is a continuation of the previous problems before the banking crisis this month.

The concern is whether the recent banking crisis will have long-lasting effects on the economy. Citibank has provided an early indication that there have been real impacts, and although it’s only been one week, the cooling in March data could spill over into inflation and tighten the economy. This is happening at the same time as falling oil prices and favorable year-over-year comparisons, which could impact inflation numbers.

“This was the first week of [Citi credit card] data following the disruption within the financial sector, and we were curious if it might have had an impact on the consumer. It sure did. .. biggest decline in total retail spending .. since the pandemic began (April 2020).”

So, the FED will likely be cautious in response to these developments, but they also have an opportunity to address inflation now and prevent it from becoming a bigger problem later on. It’s important for officials to weigh the potential consequences of their actions and consider the impact they could have down the line. Although, we expect the FED to remain less hawkish today than the ECB, which will be positive for risk assets and negative for the USD and other safe havens. So we are looking to go long on EUR/USD if this is the case and will try to sell Gold and he JPY.

EUR/USD Live Chart