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Bullish EUR/USD Trend at Risk on Dovish ECB- 1.3500 Remains Key

By , Currency Analyst  and Gregory Marks
03 April 2014 07:00 GMT

- European Central Bank (ECB)to Hold Benchmark Interest Rate at 0.25%.

- ECB President Mario Draghi to Deliver Policy Statement at 12:30 GMT.

Trading the News: European Central Bank Interest Rate Decision

According to a Bloomberg News survey, 54 of the 57 economists polled see the European Central Bank (ECB) sticking to the sidelines in April, but the market speculation (rate cut, negative deposit rates, verbal intervention, unsterilized bond purchases, Long-Term Refinancing Operation) surrounding the interest rate decision may spark increased volatility in the EUR/USD as market participants weigh the outlook for monetary policy.

What’s Expected:

Bullish-EUR-USD-Trend-at-Risk-on-Dovish-ECB--1.3500-Remains-Key-0203_body_ScreenShot025.png, Bullish EUR/USD Trend at Risk on Dovish ECB- 1.3500 Remains KeyEUR/USD ECB Economic Event

Click Here for the DailyFX Calendar

Why Is This Event Important:

The EUR/USD may push higher over the remainder of the week should the ECB merely reiterate the policy statement from the March 6 meeting, but the single currency may continue to give back the rally from earlier this year should central bank President Mario Draghi lay the groundwork to implement more non-standard measures across the monetary union.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

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

-1.6%

-1.7%

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

0.6%

0.5%

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

0.5%

-0.2%

Indeed, the heightening risk for deflation may put increased pressure on the ECB to further embark on its easing cycle, and the EUR may face a larger decline in the coming days should the central bank take additional steps to shore up the ailing economy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Euro-Zone Unemployment Rate (FEB)

12.0%

11.9%

Euro-Zone Economic Confidence (MAR)

101.4

102.4

Euro-Zone Retail Sales (MoM) (JAN)

0.8%

1.6%

However, President Mario Draghi may retain a rather neutral tone for monetary policy amid the positive developments coming out of the euro-area, and the EURUSD may continue to carve a series of higher highs & higher lows as the central bank remains reluctant to move away from its current policy.

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 Implements More Easing/Draghi Adopts Dovish Tone

  • Need red, five-minute candle following the decision/statement to consider a short Euro trade
  • If market reaction favors a short trade, sell EUR/USD 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 Retains Neutral Outlook

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

Potential Price Targets For The Rate Decision

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Looking for Higher Low, But Break Below 1.3500 Would Negative Bullish Trend
  • Interim Resistance: 1.3960-70 (61.8 expansion)
  • Interim Support: 1.3600 Pivot to 1.3620 (23.6 retracement)

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)

MAR 2014

03/06/2014 12:45 GMT

0.25%

0.25%

+68

+114

European Central Bank (ECB) March 2014 Interest Rate Decision

ECB EUR/USD Interest Rate Chart

At last month’s European Central Bank Rate Decision and Draghi presser we saw the central bank release updated forecasts for 2015 and 2014 as well as new forecasts for a myriad of figures for 2016. Although a nod from German courts for OMT actions from the central bank had led some to believe some sort of action would be taken, the fact that this did not occur and the fact that Mr. Draghi remained upbeat sent the Euro to highs near the 1.40 mark over the following few days. As for insight into this meeting, recent inflation figures out of the EU have remained subdued and these challenges may push the central bank to take some sort of action whether it be verbal intervention to weaken the Euro or a move to lower the overnight rate by 10-15bps. Any actions of greater significance may be unlikely due to the complexities of any ‘QE’ style move from the central bank.

--- 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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03 April 2014 07:00 GMT