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Bullish EUR/USD Outlook Vulnerable to Dovish ECB Policy

By , Currency Analyst  and Gregory Marks
08 May 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, 56 of the 58 economists polled anticipate the European Central Bank (ECB) to retain its current policy in May, but the EUR/USD may struggle to hold its ground should President Mario Draghi show a greater willingness to further embark on the easing cycle.

What’s Expected:

EUR/USD ECB

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Why Is This Event Important:Indeed, the ECB is coming under increased pressure to implement more non-standard measures amid the persistent threat for deflation, and we may see the central bank lay the groundwork to ease policy further in the coming months as the Governing Council struggles to achieve its one and only mandate to preserve price stability.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

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

0.8%

0.7%

Euro-Zone Economic Confidence (APR)

102.9

102.0

Euro-Zone M3 Money Supply (YoY) (MAR)

1.4%

1.1%

Subdued price growth paired with the ongoing contraction in private sector lending may prompt the ECB to adopt a more dovish outlook for monetary policy, and we may see the EUR/USD give back the advance from the beginning of the month should the fresh batch of central bank rhetoric drag on interest rate expectations.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Euro-Zone Retail Sales (MoM) (MAR)

-0.2%

0.3%

Euro-Zone Unemployment Rate (MAR)

11.9%

11.8%

Euro-Zone Trade Balance s.a. (MoM) (FEB)

15.0B

15.0B

However, the ECB may stick to the sidelines amid the positive developments coming out of the monetary union, and the EUR/USD may continue to carve higher highs & higher lows in May should the central bank remain reluctant to implement more non-standard measures.

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

Bearish EUR Trade: ECB Ramps Up Dovish Tone/Sets Expectations for More Easing

  • 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 Wait-and-See Approach

  • 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

  • Bullish Breakout in Price & RSI Raises Scope for Higher High
  • Interim Resistance: 1.3960-70 (61.8 expansion)
  • Interim Support: 1.3600 Pivot to 1.3620 (23.6 retracement)

DailyFX on Demand Will Have Full Coverage of the ECB Meeting

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR 2014

04/03/2014 11:45 GMT

0.25%

0.25%

+23

-26

April 2014 European Central Bank Interest Rate Decision

EUR/USD Chart

The ECB kept rates on hold once more in April and stated that the central bank was not excluding the use of unconventional tools if needed. Although the rate decision sent the Euro higher, when Draghi took the stage and said that the use of unconventional tools was a possibility, we saw Euro weakness across the board. Volatility was relatively weak as has been the case over the last few weeks. Market participants will note Draghi’s language in regards to the Euro as he has become more comfortable in using his position to talk down the Euro.

--- 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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08 May 2014 07:00 GMT