The European Central Bank is widely expected to lower the benchmark interest rate by 50bp to 3.25% from 3.75% following the coordinated rate cut on October 8th. ECB President Trichet joined Fed Chairman Bernanke last month in a joint effort to restore confidence in the financial markets, and unexpectedly lowered borrowing costs by 50bp to 3.75% after holding the key rate at 4.25% for three consecutive meetings.
Trading the News: European Central Bank Rate Decision What’s Expected
Time of release: 11/06/2008 12:45 GMT, 07:45 EST
Primary Pair Impact : EURUSD
Expected: 3.25%
Previous: 3.75% Impact of the ECB rate decision on EURUSD over the last 3 months
October 2008 ECB Rate Decision
ECB policy members held the benchmark interest rate steady at 4.25% despite the downturn in the global financial market. The central bank was widely expected to hold a neutral policy stance as inflation remains well above their desired target, but could be forced to lower borrowing costs over the coming months as the spillover effects of the credit crunch spreads throughout the global economy. Increased turmoil in the financial sector has already led governments throughout Europe to step in as the lender of last resort, and policy makers may opt to take additional steps to avoid a severe downturn in the economy. Moreover, falling commodity prices should help to lower prices pressures in the near-term, which should allow the ECB to push inflationary concerns to the backburner as fears of a recession intensify.
September 2008 ECB Rate Decision
The ECB held a neutral policy stance to leave their benchmark interest unchanged at 4.25%, stating that upside inflation risks remains highly uncertain going forward. The central bank noted that they may look to increase the interest rate in order to anchor inflation expectations, and went onto say that the bank is ready to take the necessary steps if upward wage pressures accelerate in the following months. Amid the hawkish rhetoric, the growth outlook for the 15 European nations has deteriorated considerably since the beginning of the year, and has fueled recessionary concerns for the economy record high borrowing costs continues to limit economic activity. As the central bank remains focused on upside prices pressures, economic growth could weaken further as many countries throughout Europe are on the brink of a cession.
August 2008 ECB Rate Decision
The European Central Bank held the benchmark interest rate steady at 4.25% as the bank continued to hold a hawkish outlook. President Trichet stated that inflation is likely to remain above the central bank’s target ‘for a protracted period of time,’ but noted that economic activity will be ‘particularly weak’ over the second and third quarters. Record high borrowing costs have clearly taken a toll on the Euro-Zone, and conditions may only get worse as economic growth in the global economy slows down. Meanwhile, upside wage pressures have becoming a growing concern for the bank, and may force the ECB to hold rates steady at the seven year high as they try to anchor inflation expectations.
How To Trade This Event Risk
The European Central Bank is widely expected to lower the benchmark interest rate by 50bp to 3.25% from 3.75% following the coordinated rate cut on October 8th. ECB President Trichet joined Fed Chairman Bernanke last month in a joint effort to restore confidence in the financial markets, and unexpectedly lowered borrowing costs by 50bp to 3.75% after holding the key rate at 4.25% for three consecutive meetings. In addition, Mr. Trichet has dropped his hawkish outlook as he expects prices pressures to ease over the following months, and explicitly stated that the downside risks to growth remain highly uncertain in the near-term, which leaves the door open for additional rate cuts as the Euro-Zone heads for a recession. Economic activity in the 15 European nations operating under the euro contracted 0.2% in the second quarter, and may face a full blown recession by the end of the year as the major economies throughout Europe find themselves in troubled waters. Furthermore, it has become increasing evident that the ECB is increasing their efforts beyond their mandate as they loaned EUR 5B to Hungary, and initiated currency swap agreements with Denmark and Switzerland. Meanwhile, a Bloomberg News survey showed that all of the 52 economists polled forecast the central bank to deliver a 50bp cut on Thursday, which would certainly stoke increased selling pressures for the euro. In addition, Credit Suisse overnight index swaps are showing that market participants expect the ECB to cut at least 125bp over the next 12 months, which would drag on the euro going into 2009. However, as investors price in a rate cut by the ECB, the commentary by President Trichet following the decision will play a vital role in driving volatility for the euro.
Trading the given event risk may not seem as clear cut as our previous trades, and like the Bank of Canada, the ECB could follow suit and surprise the markets by lowering borrowing costs by 25bp despite expectations for a 50bp cut. As a result, if President Trichet fails to lower the key rate to 3.25% and raises the growth forecast, we will favor a bullish euro trade, and will look for a green, five-minute candle following the release to validate a long entry on two lots of EURUSD. Our initial stop will be placed at the nearby swing low (or reasonable distance depending on volatility), and this risk will determine out first target. Our second target will be based purely on our discretion, and in order to preserve our profits, we will move the second lot to breakeven once the first trade reaches its target.
On the other hand, increased fears of a global meltdown paired with the lack of stability in the global financial market certainly strengthens the argument for further easing in policy, which could lead President Trichet to lower the benchmark lending rate by 50bp or more. Earlier this week, the Reserve Bank of Australia lowered their respective interest rate by 75bp amid expectations for a 50bp cut, and the ECB may decide to take a preemptive approach and lower borrowing costs significantly to avoid a severe downturn in the economy. Therefore, an inline print or a 75bp cut would favor a short EURUSD trade, and we will follow the same setup as the long trade listed above, just in reverse.