Bullish potential in euro and pound is slowly coming to an end, so there may be a bearish correction soon. This does not come as a surprise because risk appetite is declining, primarily due to statements from US politicians who keep talking about the importance of continuing the fight against price pressure and the risks it brings. There is also ongoing talk in the market over where the current banking crisis will lead and how it will severely affect an economy that is on the verge of recession, which is a direct indication that demand for safe haven assets is returning.
Minneapolis Fed President Neel Kashkari recently shared his thoughts on the state of the US economy, the current banking crisis and whether the US is heading into recession. When asked if the crisis drove the US economy into recession, he said that it definitely brought it closer, but it is not clear how much banking stresses are leading to a widespread credit crunch. "This credit crunch will really slow down the economy in the future," he noted.
Several major banks went bankrupt in early March this year, prompting the Federal Reserve, the Finance Ministry and the Federal Deposit Insurance Corporation (FDIC) to step in and protect depositors. When asked about providing additional liquidity and guarantees to the public, the FDIC spokesperson said, "we have certain fundamental problems, regulatory problems facing our banking system. However, I am confident that the biggest banks in the world are very big to just go bust." This clearly hints that there will be support if necessary.
As for the outflow of deposits from smaller banks to larger institutions, the Fed president stressed that the reason why deposits are flowing to the larger banks is that these banks are in a premium position, which is not fair. "This kind of support from the Fed and the Finance Ministry is putting tremendous negative pressure on regional and local banks and this needs to be addressed," he said.
Kashkari concluded the interview by adding that once the stressful period is over, a regulatory system needs to be developed so that it will not only ensure the reliability of the US banking system, but is also fair to all banks.
Current technical picture shows that EUR/USD bulls have all the chances to continue growth towards new March highs. But for this to happen, the quote has to stay above 1.0820. Only by that will the pair be able to go beyond 1.0870 and rise to 1.0900 and 1.0945. In case of a decline below 1.0820, the pair will approach 1.0780 and 1.0740.
In GBP/USD, bulls are ready to keep storming the monthly highs, but the quote has to stay above 1.2280 and break through 1.2340. That will certainly prompt a rise to 1.2390 and 1.2450. Should bears take control of 1.2280, a breakdown will occur, which will push the pair down to 1.2220 and 1.2160.
