The euro has posted sharp gains at the start of the week, extending its rally against a retreating US dollar. In the North American session, EUR/USD is trading at 1.0740, up 0.95% and its highest level since February 15.

Perhaps it is fitting that today’s economic calendar has no US or European releases, allowing investors to focus their full attention on the fallout from the collapse of the Silicon Valley Bank (SVB). This is the largest US bank to fail since 2008 and understandably, investors are alarmed that the contagion could spread and the US banking system could be at risk. Over the weekend, New York officials closed Signature Bank, one of the main banks in the cryptocurrency sector.

The US government acted decisively and said SVB depositors (but not investors) would be protected and President Biden made a television appearance to reassure a nervous public that the banking sector is safe and those responsible for the Svb Collapse would be held accountable. The fact that Biden had to address the nation reflects fears that the SVB failure could trigger a full-blown banking crisis.

 After SVB, markets reprice the Fed’s next move

The SVB collapse has sent the US dollar in retreat against the majors, as the market expectations of a 50-bp hike from the Fed next week have evaporated. Just last week, the markets had priced a 50-bp hike at 70% and a 25-bp increase at 30%. That has shifted to a 70% likelihood of a 25-bp increase and a 30% chance of the Fed taking a pause, with a zero chance of a 50-bp hike. Goldman Sachs had projected a 25-bp last week but now expects the Fed to pause.

The US releases CPI on Tuesday and the release was expected to play a key role in the Fed rate decision, but that was before the SVB collapse triggered a massive repricing in the markets. Still, the inflation report will be widely watched by investors and by the Fed. Headline inflation is expected to fall to 6.0% in February, after a 6.4% gain in January.

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EUR/USD Technical

• EUR/USD is testing resistance at 1.0718. The next resistance level is 1.0798
• There is support at 1.0622 and 1.0542