- European Central Bank (ECB) to Adjust QE Program & Reduce Deposit-Rate.
- Will ECB President Mario Draghi Keep the Door Open to Expand Policy Further?
Trading the News: European Central Bank (ECB) Interest Rate Decision
The European Central Bank (ECB) interest rate decision may fuel a further decline in EUR/USD amid speculation for additional monetary support but, heavy expectations for a meaningful announcement may ultimately trigger a short-squeeze in the exchange rate should the central bank disappoint.
What’s Expected:
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Why Is This Event Important:Beyond bets for a meaningful adjust to the ECB’s quantitative easing (QE) program, market participants are looking for a further reduction in the central bank’s deposit-rate as the Governing Council struggles to achieve its one and only mandate for price stability. Efforts to further insulate the monetary union may push EUR/USD to give back the advance from the March low (1.0461) amid the deviating paths for monetary policy.
Expectations: Bearish Argument/Scenario
| Release | Expected | Actual |
|---|---|---|
| Consumer Price Index Core (YoY) (NOV A) | 1.1% | 0.9% |
| Gross Domestic Product s.a. (YoY) (3Q A) | 1.7% | 1.6% |
| Retail Sales (MoM) (SEP) | 0.2% | -0.1% |
The disinflationary environment accompanied by the weakening outlook for global growth may encourage the Governing Council to enlist more policy tools to shore up the real economy, and the Euro stands at risk of facing additional headwinds in 2016 should the central bank keep the door open to further embark on its easing cycle.
Risk: Bullish Argument/Scenario
| Release | Expected | Actual |
|---|---|---|
| Economic Confidence (NOV) | 105.9 | 106.1 |
| M3 Money Supply (YoY) (OCT) | 4.9% | 5.3% |
| Markit Purchasing Manger Index- Composite (NOV P) | 54.0 | 54.4 |
Nevertheless, improved confidence paired with the pickup in lending to small and medium-sized enterprises (SME) may prompt the ECB to take a more patient approach as the non-standard measures work their way through the real economy, and the central bank may opt to easing policy further in 2016 as there appears to be a sustainable recovery taking shape in the monetary union.
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How To Trade This Event Risk(Video)
Bearish EUR Trade: ECB Expands/Extends QE & Cuts Deposit-Rate
- Need red, five-minute candle following the policy announcement to consider a short EUR/USD trade.
- If market reaction favors a bearish Euro trade, sell EUR/USD with two separate position.
- Set stop at the near-by swing high/reasonable distance from cost; need 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: Central Bank President Draghi Attempts to Buy More Time
- 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 Release
EURUSD Daily
Chart - Created Using FXCM Marketscope 2.0
- The March (1.0461) and April low (1.0519) remain in focus for EUR/USD as the pair fails to retain the bullish formations from earlier this year but, there appears to be a disconnect with the Relative Strength Index (RSI) as the oscillator holds above oversold territory despite the decline in price.
- DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long EUR/USD since November 19, but the ratio continues to come off of recent extremes as it narrows to +1.11, with 53% of traders now long.
- Interim Resistance: 1.1052 (November high) to 1.1090 (50% retracement)
- Interim Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)
Impact that the ECB rate decision has had on EUR/USD during the last meeting
| Period | Data Released | Estimate | Actual | Pips Change | Pips Change |
|---|---|---|---|---|---|
| OCT 2015 | 10/22/2015 11:45 & 12:30 GMT | 0.05% | 0.05% | -87 | -207 |
October 2015 European Central Bank Interest Rate Decision
Even though the European Central Bank (ECB) stuck to its current policy in October, the Governing Council showed a greater willingness to further embark on its easing cycle as the central bank opened the door for a further reduction in deposit-rate. As the ECB pledges to re-examine its non-standard measures, the central bank may continue to push monetary policy into uncharted territory in an efforts to further insulate the monetary union . The Euro sold off as the ECB removed the floor on interest rates, with EUR/USD breaking below the 1.1200 handle following the interest rate decision to close the day at 1.1107.
*As we approach the holidays and thus illiquid markets, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."
Three Factors Warn of Perfect Storm in FX Markets - Caution Advised
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--- Written by David Song, Currency Analyst and Shuyang Ren
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.
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