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EUR/USD: Trading the European Central Bank Interest Rate Decision

EUR/USD: Trading the European Central Bank Interest Rate Decision

2011-09-07 18:49:00
David Song, Currency Strategist

Trading the News: European Central Bank Interest Rate Decision

What’s Expected:

Time of release: 09/08/2011 11:45 GMT, 7:45 EDT

Primary Pair Impact: EURUSD

Expected: 1.50%

Previous: 1.50%

DailyFX Forecast: 1.50%

Why Is This Event Important:

The European Central Bank is widely expected to keep the benchmark interest rate at 1.50% in August, but we may see President Jean-Claude Trichet continue to soften his hawkish tone for monetary policy as the region faces a slowing recovery. Heightening fears surrounding the sovereign debt crisis paired with the increased risk of a double-dip recession may encourage Mr. Trichet to talk down speculation for higher borrowing costs, and the Governing Council may show an increased willingness to delay its exit strategy further as European policy makers struggle to restore investor confidence. As there appears to be an increased reliance on the ECB to address the risks for the region, the central bank may step up its efforts to ease the ongoing turmoil within the financial system, and the board may vote to expand its nonstandard measures in an effort to shore up the economy. However, the ECB may preserve a neutral tone as the risk for inflation remains tilted to the upside, and the Governing Council may carry its wait-and-see approach into 2012 as the fundamental outlook for Europe remains clouded with high uncertainty.

Recent Economic Developments

The Upside




Euro-Zone Retail Sales (MoM) (JUL)



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



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



The Downside




Euro-Zone Unemployment Rate (JUL)



Euro-Zone Trade Balance s.a. (JUN)



Euro-Zone Gross Domestic Product s.a. (QoQ) (2Q A)



The stickiness in price growth paired with the rise in consumption could push the ECB to toughen its stance against inflation, and hawkish comments from President Trichet may lead the EUR/USD to recoup the losses from earlier this month as interest rate expectations gather pace. However, the ongoing weakness within the real economy paired with the slowdown in global trade could force the central bank scale back its outlook for inflation, and Mr. Trichet may adopt a dovish tone for future policy as growth and inflation taper off. In turn, the near-term reversal from 1.4548 may gather pace in the days ahead, and the euro-dollar may threaten the rebound from back in July (1.3836) should the Governing Council see scope to scale back the rate hikes from earlier this year.

Potential Price Targets For The Release

EURUSD_Trading_the_European_Central_Bank_Interest_Rate_Decision_body_ScreenShot053.png, EUR/USD: Trading the European Central Bank Interest Rate Decision

How To Trade This Event Risk

As the ECB maintains its current policy, trading the rate decision may not be as clear-cut as some of our previous trades, but comments highlighting an increased risk for inflation could pave the way for a long Euro trade as interest rate expectations pick up. Therefore, if the central bank talks down speculation for additional monetary stimulus and looks to toughen its stance against inflation, we will need a green, five-minute candle following the statement to generate a buy entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to lock-in our potential winnings.

On the other hand, the slowdown in economic activity paired with the heightening risk for contagion may dampen the outlook for inflation, and the central bank may adopt a dovish tone for monetary policy as the sovereign debt crisis curbs the prospects for future growth. As a result, if Mr. Trichet talks down speculation for higher interest rates and shows an increased willingness to delay the exit strategy further, we will carry out the same strategy for a short euro-dollar trade as the long position laid out above, just in the opposite direction.

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


Data Released



Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

AUG 2011

08/04/2011 11:45 GMT





August 2011 European Central Bank Interest Rate Decision

As expected, the European Central Bank kept the benchmark interest rate at 1.50% in August, but softened its hawkish tone for monetary policy in light of the slowing recovery in Europe. ECB President Jean-Claude Trichet said the central bank will resume its bond purchase program, while providing ample liquidity to the banking sector, and held a cautious outlook for the region as economy faces a slowing recovery. At the same time, the central bank reiterated that the risk for inflation remains tilted to the upside, and the Governing Council may endorse a wait-and-see approach throughout the second-half of the year as the fundamental outlook remains clouded with high uncertainty. Indeed, market participants showed a bearish reaction to the rate decision, with the EUR/USD slipping back below 1.4200, and the single-currency continued to lose ground throughout the North American trade as the exchange rate settled at 1.4091 at the end of the day.

EURUSD_Trading_the_European_Central_Bank_Interest_Rate_Decision_body_ScreenShot052.png, EUR/USD: Trading the European Central Bank Interest Rate Decision

Questions? Comments? Join us in the DailyFX Forum

Join DailyFX Technical Currency Strategist Joel Kruger in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.


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