Euro edges lower, ECB and other central banks take joint action

After a tumultuous week in the financial markets, things appear to have settled down. The euro is showing limited movement, trading at 1.0655.

Central banks move in unison to contain contagion

It was anything but a quiet Sunday, as the Swiss government engineered a bank merger, with UBS agreeing to buy Credit Suisse, the second largest bank in Switzerland. At the same time, six major central banks, including the Federal Reserve and the ECB, announced a joint move to ensure liquidity in the financial system.

Both moves were aimed at restoring confidence after two US banks collapsed and Credit Suisse shares plunged. This has caused market turmoil and battered the global banking system, with European, Japanese and US bank shares all down by around 10%. The palpable fear is that the contagion could spread and trigger a full-blown financial crisis. The decisive action by the Swiss government and the major central banks appears to have brought some calm to the markets.

The ECB kept the pedal on the floor last week, delivering a 50-basis point rate hike which brought the cash rate to 3.0%. The move came in the middle of the banking crisis, and there was speculation that the Bank would opt for a modest 25-bp increase. There were two strong reasons for the oversize rate hike. First, ECB President Lagarde had stated that the ECB would raise rates by 50 bp, and not following through could have damaged the Banks’ credibility. Second, inflation remains high at 8.5%, and with Germany and the eurozone showing some decent economic numbers, the conditions were ripe for a 50-bp move. The ECB is lagging behind other central banks with a cash rate of 3.0% and will have to continue raising rates to lower inflation closer to the target of around 2%.

EUR/USD technical

• 1.0622 has been a key level throughout the week. EUR/USD is testing resistance at this line. Next is 1.0718.

• There is support at 1.0542 and 1.0446.