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EUR/USD Risks Fresh 2014 Lows on ECB Rate Cuts, Non-Standard Measures

By , Currency Analyst
05 June 2014 07:00 GMT

- European Central Bank Seen Implementing Rate Cut & Negative Deposit Rates.

- Will Governing Council Also Introduce Non-Standard Measures?

Trading the News: European Central Bank (ECB) Interest Rate Decision

The EUR/USD may face a sharp selloff over the next 24-hours of trade as market participants see the European Central Bank (ECB) pushing monetary policy into uncharted territory.

What’s Expected:

EUR/USD ECB

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Why Is This Event Important:

Beyond expectations for a rate cut & negative deposit rates, the ECB may also look to implement more non-standard measures in an effort to increase lending to small-and-medium sized enterprises (SME), but the bearish sentiment surrounding the single-currency may end up being short-lived should central bank President Mario Draghi scale back his willingness to further embark on the easing cycle.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index (YoY) (MAY A)

0.6%

0.5%

M3 Money Supply (YoY) (APR)

1.1%

0.8%

Gross Domestic Product (QoQ) (1Q A)

0.4%

0.2%

The growing threat for deflation paired with the ongoing contraction in private sector credit may prompt the ECB to implement a range of tools to address the weakening outlook for the monetary union, and the EUR/USD may test fresh yearly lows over the near-term should central bank leave the door open for more easing.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Unemployment Rate (APR)

11.8%

11.7%

Economic Confidence (MAY)

102.2

102.7

Business Climate Indicator (MAY)

0.30

0.37

Nevertheless, the downtick in unemployment paired with improvement in confidence may encourage the ECB to further delay its easing cycle, and a rate cut alone may present a buying opportunity for the EUR/USD as market participants have already priced-in a reduction in the benchmark interest rate.

Join DailyFX on Demand to Cover the Entire ECB Rate Decision!

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Cuts Rates & Keeps Door Open for More Monetary Easing

  • Need red, five-minute candle following the statement to consider a short Euro position
  • 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 Refrains from Implementing Non-Standard Measures

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

Read More:

Price & Time: The EUR/USD Fork in the Road

EUR/USD Wedge Lingers Pre-ECB, USD/CHF Flirts with Double Bottom

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily

Chart - Created Using FXCM Marketscope 2.0

  • Broke Ascending Channel & Bullish RSI Momentum From 2013 Following Last ECB Meeting
  • Interim Resistance: 1.3770 (38.2% expansion) to 1.3780 (38.2% retracement)
  • Interim Support: 1.3490 (50.0% retracement) to 1.3500 Pivot

Impact that the ECB 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)

MAY

05/08/2014 11:45 GMT

0.25%

0.25%

+43

-94

May 2014 European Central Bank Interest Rate Decision

EUR/USD Chart

The European Central Bank kept the benchmark interest rate on hold in May as the central bank continues to see a gradual recovery in the monetary union, but it seems as though the Governing Council is showing a greater willingness to implement additional monetary support in the coming months as President Mario Draghi highlights a greater risk for deflation. Despite the initial market reaction to the ECB rate decision, speculation for more easing dragged on the EUR/USD, with the pair closing the day at 1.3838.

--- 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 June 2014 07:00 GMT