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Forex: EURUSD- Trading the European Central Bank (ECB) Rate Decision

By , Currency Analyst
09 January 2013 20:25 GMT

Trading the News: European Central Bank Interest Rate Decision

What’s Expected:

Time of release: 01/10/2013 12:45 GMT, 7:45 EST

Primary Pair Impact: EURUSD

Expected: 0.75%

Previous: 0.75%

DailyFX Forecast: 0.75%

Why Is This Event Important:

Beyond the European Central Bank (ECB) interest rate decision, the press conference with President Mario Draghi is spark a selloff in the the single currency as the Governing Council keeps the door open to lower the benchmark interest rate further. As the deepening recession in the euro-area threatens price stability, the central bank head may sound more dovish this time around, and Mr. Draghi may show a greater willingness to push borrowing costs to a fresh record-low in an effort to stem the downside risks for growth and inflation.

Recent Economic Developments

The Upside

Release

Expected

Actual

Euro-Zone Economic Confidence (DEC)

86.3

87.0

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

2.1%

2.2%

Euro-Zone Sentix Investor Confidence (JAN)

-14.2

-7.0

The Downside

Release

Expected

Actual

Euro-Zone Unemployment Rate (NOV)

11.8%

11.8%

Euro-Zone Retail Sales (MoM) (NOV)

0.3%

0.1%

Euro-Zone Construction Output s.a. (3M) (NOV)

--

-1.6%

The ongoing improvement in confidence along with the sticky inflation may encourage the ECB to strike a more neutral tone for monetary policy, and we may see the Governing Council talk down bets for another rate cut as the central bank sees the economy returning to growth later this year. However, record-high unemployment along with the persistent slack in the real economy may produce a very tepid recovery in the euro-area, and we may see President Draghi continue to embark on the easing cycle in an effort to preserve the 2% target for inflation.

Potential Price Targets For The Rate Decision

Forex_EURUSD-_Trading_the_European_Central_Bank_ECB_Rate_Decision_body_ScreenShot160.png, Forex: EURUSD- Trading the European Central Bank (ECB) Rate Decision

As the EURUSD threatens the bullish trend carried over from 2012, a slew of dovish rhetoric is likely to drag on the exchange rate, and we will look for a break and a close below the 1.3000 figure to see a more meaningful reversal in the pair. However, a more neutral statement from the ECB should help to preserve the upward trending channel in the EURUSD, and the single currency may continue to work its way towards the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as market participants scale back bets for another rate cut.

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 policy statement may set the stage for a long Euro trade as market participants scale back bets for additional monetary support. Therefore, if President Draghi talks down bets for a rate cut, we will need to see a green, five-minute candle following the policy statements to generate a long 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 establish 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 firs trade hits its mark in an effort to preserve our profits.

In contrast, the Governing Council may sound more cautious this time around as the region faces a deepening recession, and the central bank may continue to embark on its easing throughout the first-half of 2013 in an effort to encourage a stronger recovery. As a result, if the ECB shows a greater willingness to lower borrowing costs further, we will carry out the same setup for a short euro-dollar trade as the long position laid out above, just in the opposite direction.

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)

DEC 2012

12/06/2012 12:45 GMT

0.75%

0.75%

0

-89

November 2012 European Central Bank Interest Rate Decision

Forex_EURUSD-_Trading_the_European_Central_Bank_ECB_Rate_Decision_body_ScreenShot159.png, Forex: EURUSD- Trading the European Central Bank (ECB) Rate Decision

The European Central Bank (ECB) struck a rather dovish tone for monetary policy after keeping the benchmark interest rate at 0.75%, with President Mario Draghi showing a greater willingness to reduce borrowing costs further, and it seems as though the Governing council will continue to embark on its easing cycle in 2013 as the region faces a deepening recession. The initial bounce in the EURUSD was short-lived as the exchange rate slipped back below the 1.3050 figure, and the single currency tumbled lower throughout the North American trade as the pair ended the day at 1.2968.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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09 January 2013 20:25 GMT