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EURUSD to Falter on More Dovish ECB Forward-Guidance

By , Currency Analyst
05 September 2013 07:00 GMT

- European Central Bank (ECB) to Retain Current Policy, Forward-Guidance

- ECB Has Called for Export-Led Recovery; Verbal Intervention on Tap?

Trading the News: European Central Bank Interest Rate Decision

The European Central Bank (ECB) is widely expected to keep rates on hold in the midst of a budding recovery, but a dovish twist on the central bank’s forward-guidance may spark a fresh selloff in the EURUSD as the Governing Council looks for an export led recovery.

What’s Expected:

Time of release: 09/05/2013 11:45 GMT, 7:45 EDT

Primary Pair Impact: EURUSD

Expected: 0.50%

Previous: 0.50%

DailyFX Forecast: 0.50%

Why Is This Event Important:

With the ongoing theme of utilizing non-standard measures, ECB President Mario Draghi, who’s scheduled to deliver the policy statement at 12:30 GMT, may implement his own style of ‘verbal intervention’ to encourage a stronger recovery while addressing the threat for deflation. In turn, the Euro may struggle to hold its ground should the central bank show a preference for a lower exchange-rate.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Euro-Zone Retail Sales (MoM) (JUL)

0.2%

0.1%

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

1.4%

1.3%

Euro-Zone Unemployment Rate (JUL)

12.1%

12.1%

The slowdown in private consumption along with record-high unemployment may continue to dampen the outlook for growth and inflation, leading the ECB to further employ extraordinary measures to support the fragile recovery.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Euro-Zone Gross Domestic Product s.a. (QoQ) (2Q P)

0.3%

0.3%

Euro-Zone Economic Confidence (AUG)

93.8

95.2

Euro-Zone Purchasing Manager Index- Composite (AUG A)

50.9

51.7

However, the ongoing improvements in the more forward-looking indicators may encourage the Governing Council to scale back its dovish tone for monetary policy and dampen bets for further rate cuts.

How To Trade This Event Risk(Video)

Trading the ECB interest rate decision may not be as clear cut as some of our other trade setups as the press conference with President Draghi ends with a Q&A session.

The entire ECB rate decision will be covered LIVE in Analyst-on-Demand

Bearish EUR Trade: ECB Adjust Forward-Guidance in Favor of Easing Cycle

  • Need to see red, five-minute candle following the statement to consider a short EURUSD trade
  • If market reaction favors a short trade, sell EURUSD with two separate position
  • Place stop at the near-by swing high/reasonable distance from cost; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is met, set reasonable limit

Bullish EUR Trade: Draghi Strikes More-Neutral Tone

  • Need green, five-minute candle to favor a long EURUSD trade
  • Implement same strategy as the bearish euro trade, just in the opposite direction

Potential Price Targets For The Rate Decision

EURUSD Daily

Forex_EURUSD_to_Falter_on_More_Dovish_ECB_Forward-Guidance_body_ScreenShot068.png, EURUSD to Falter on More Dovish ECB Forward-Guidance

  • Breaks down from bullish trend; bearish divergence in Relative Strength Index
  • New Resistance: 1.3220 (50.0% retracement) – 1.3240 (78.6% expansion)
  • Soft Support: 1.3310 (38.2% retracement) - 1.3340 (61.8% expansion)

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)

AUG 2013

08/01/2013 11:45 GMT

0.50%

0.50%

+7

-28

August 2013 European Central Bank Interest Rate Decision

Forex_EURUSD_to_Falter_on_More_Dovish_ECB_Forward-Guidance_body_ScreenShot067.png, EURUSD to Falter on More Dovish ECB Forward-Guidance

The European Central Bank retained its pledge to keep the benchmark interest rate at 0.50% ‘or lower levels for an extended period of time’ in order to encourage a stronger recovery, and went onto say that ‘developments have to be significantly better than our current baseline scenario for our outlook for price stability in order for us to change guidance’ amid the persistent slack in the real economy. Despite the rebound from the 1.3200 handle, the EURUSD struggled to hold its ground following the ECB press conference, with the pair ending the day at 1.3207.

--- 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, please follow this link

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05 September 2013 07:00 GMT