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EURUSD: Trading the European Central Bank Interest Rate Decision

By , Currency Analyst
03 October 2012 19:30 GMT

Trading the News: European Central Bank Interest Rate Decision

What’s Expected:

Time of release: 10/04/2012 11:45 GMT, 7:45 EDT

Primary Pair Impact: EURUSD

Expected: 0.75%

Previous: 0.75%

DailyFX Forecast: 0.75%

Why Is This Event Important:

Currency traders may show a fairly muted reaction to the European Central Bank interest rate decision as the board is widely expected to maintain its current policy, but the press conference with President Mari Draghi may instill a bearish outlook for the Euro should the central bank head keep the door open to expand monetary policy further. Indeed, Mr. Draghi may sound more dovish this time around as the euro-area faces a deepening recession, and the ECB may now look to target the benchmark interest rate in an effort to stem the downside risks for growth and inflation. However, as the unlimited bond-buying program comes under increased criticism, there could be a growing rift within the Governing Council, and we may see an increasing number of ECB officials speak out against the non-standard measure as it puts the committee’s independence and credibility at risk.

Recent Economic Developments

The Upside

Release

Expected

Actual

Euro-Zone Producer Price Index (YoY) (AUG)

2.6%

2.7%

Euro-Zone Consumer Price Index Estimate (YoY) (SEP)

2.4%

2.7%

Euro-Zone Trade Balance (JUL)

15.0B

15.6B

The Downside

Release

Expected

Actual

Euro-Zone Unemployment Rate (AUG)

11.4%

11.4%

Euro-Zone Purchasing Manager Index Composite (SEP A)

46.6

45.9

Euro-Zone Economic Confidence (SEP)

86.1

85.0

Although we anticipate to see a more dovish ECB, the stickiness in price growth may encourage the central bank to strike a more neutral tone for monetary policy, and Mr. Draghi may attempt to talk up the Euro as the unlimited bond-buying program helps to alleviate the threat for contagion. However, the ECB may turn increasingly pessimistic towards the region amid the ongoing weakness in the real economy paired with record-high unemployment, and the central bank may show a greater willingness to ease policy further in an effort to lift the region out of recession.

Potential Price Targets For The Rate Decision

EURUSD_Trading_the_European_Central_Bank_Interest_Rate_Decision_body_ScreenShot004.png, EURUSD: Trading the European Central Bank Interest Rate Decision

As the EURUSD maintains the range-bound price action carried over from the previous week, a shift in the policy outlook may set the stage for a bullish breakout in the exchange rate, and we may see the euro-dollar maintain the bullish trend from earlier this year should the ECB curb bets for additional monetary support. However, the weakening outlook for the region may encourage the central bank to lower the benchmark interest rate further, and Mr. Draghi may sound increasingly cautious this time around amid the heightening risk for a prolonged economic downturn.

How To Trade This Event Risk

Trading the ECB rate decision may not be as clear cut as some of our previous trades as the central bank sticks to its current policy, but a less dovish statement following the rate decision may pave the way for a long Euro trade as market participants scale back bets for a rate cut. Therefore, if President Draghi endorses a wait-and-see approach for the near to medium-term, we will need to see a green, give-minute candle following the announcement to establish a buy entry on two-lots of EURUSD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in order to preserve our profits.

On the other hand, the Governing Council may continue to cast a weakened outlook for the region amid the growing threat for a prolonged recession, and the central bank may show a greater willingness to lower borrowing costs further in an effort to shore up the ailing economy. As a result, if the ECB talks up speculation for a rate cut, we will carry out the same setup for a short euro-dollar trade as the long position laid out above, just in reverse.

Impact that the European Central Bank Interest Rate Decision has had on EUR during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

SEP 2012

09/06/2012 11:45 GMT

0.75%

0.75%

-11

+18

September 2012 European Central Bank Interest Rate Decision

EURUSD_Trading_the_European_Central_Bank_Interest_Rate_Decision_body_ScreenShot002.png, EURUSD: Trading the European Central Bank Interest Rate Decision

As expected, the European Central Bank kept the benchmark interest rate at 0.75% in August, but went onto say that the Governing Council may ‘undertake outright open market operations’ as the sovereign debt crisis continues to drag on the real economy. Although the ECB increased its pledge to shore up the region, the lack of an immediate response sparked a bearish reaction in the Euro, and we saw the single currency struggle to hold its ground throughout the North American trade as the pair ended the day at 1.2178.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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View the Expo Presentation on ‘Trading the News’ For Additional Resources

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03 October 2012 19:30 GMT