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Euro Vulnerable to ECB 2016 Projections- Key Top in Place at 1.3800?

By , Currency Analyst  and Gregory Marks
06 March 2014 08:00 GMT

- European Central Bank (ECB)to Publish 2016 Economic Projections

- Governing Council Sees Headline 2015 Inflation at 1.3%

Trading the News: European Central Bank Interest Rate Decision

According to a Bloomberg News survey, 40 of the 54 economists polled see the European Central Bank (ECB) retaining its current policy in March, but the broad range of market speculation (rate cut, negative deposit rates, verbal intervention, unsterilized bond purchases, Long-Term Refinancing Operation) may produce increased volatility around the interest rate decision as market participants weigh the outlook for monetary policy.

What’s Expected:

Time of release: 03/06/2014 12:45 GMT, 7:45 EST

Primary Pair Impact: EURUSD

Expected: 0.25%

Previous: 0.25%

DailyFX Forecast: 0.25%

Why Is This Event Important:

Despite expectations of seeing the ECB further embark on its easing cycle, the central bank’s 2016 economic projects may set the tone for the Euro should the figures highlight a greater threat for deflation, and an inflation forecast below 1.3% may trigger a sharp selloff in the EURUSD as it heightens bets for additional monetary support.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Euro-Zone Unemployment Rate (JAN)

12.0%

12.0%

Euro-Zone Trade Balance s.a. (DEC)

14.4B

13.7B

Euro-Zone Industrial Production s.a. (MoM) (DEC)

-0.3%

-0.7%

Indeed, the ECB’s 2016 forecast may highlight a greater threat for deflation as the EU lowers its own growth projections for the monetary union, and a material shift in the policy outlook may lead the EURUSD to give back the rebound from February as interest rate expectations deteriorate.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Euro-Zone Retail Sales (MoM) (JAN)

0.8%

1.6%

Euro-Zone Consumer Price Index (YoY) (FEB A)

0.7%

0.8%

Euro-Zone Gross Domestic Product s.a. (QoQ) (4Q A)

0.2%

0.3%

However, President Mario Draghi may adopt a rather neutral tone for monetary policy amid the recent pickup in economic activity, and the Euro may continue to threaten the 1.3800 handle should the central bank scale back its willingness to further embark on its easing cycle.

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

DailyFX on Demand Will Have Full Coverage of the ECB Meeting

Bearish EUR Trade: ECB Loosens Policy and/or Highlights Greater Risk for Deflation

  • Need red, five-minute candle following the decision/statement to consider a short Euro trade
  • If market reaction favors a short trade, sell EURUSD with two separate position
  • Set stop at the near-by swing high/reasonable distance from cost; 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: Governing Council Sticks to Current Policy

  • 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_Euro_Vulnerable_to_ECB_2016_Projections-_Key_Top_in_Place_at_1.3800_body_Picture_2.png, Euro Vulnerable to ECB 2016 Projections- Key Top in Place at 1.3800?

Chart - Created Using FXCM Marketscope 2.0

  • Marks Another Failed Close Above 1.3800; Retails 2008 Down Trend
  • RSI Struggling to Preserve Bullish Momentum Carried Over From February
  • Interim Resistance: 1.3800 (100.0 expansion) to 1.3830 (61.8 retracement)
  • Interim Support: 1.3450 (38.2% retracement) to 1.3460 (50.0% 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)

FEB 2014

02/06/2014 12:45 GMT

0.25%

0.25%

+87

+88

February 2014 European Central Bank Interest Rate Decision

Forex_Euro_Vulnerable_to_ECB_2016_Projections-_Key_Top_in_Place_at_1.3800_body_Picture_1.png, Euro Vulnerable to ECB 2016 Projections- Key Top in Place at 1.3800?

Although the Euro was little changed following the announcement that rates would remain on hold, Draghi’s presser sparked a wave of Euro strength. The central bank head stated that the complexity of the situation prevented the ECB from action ‘this month.’ Despite a lack of Euro volatility as of late, as the EURUSD pair sits just below a 10yr trendline ahead of a key ECB meeting, we may very well see directional trends form in regards to fundamental developments. As many market participants are expecting ECB action in regards to a rate cut of some sort, little to no action could be seen as bullish for the Euro if it breaks and holds current key resistance levels.

--- Written by David Song, Currency Analyst and Gregory Marks

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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06 March 2014 08:00 GMT