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EURUSD: Trading the European Central Bank Interest Rate Decision

EURUSD: Trading the European Central Bank Interest Rate Decision

Trading the News: European Central Bank Interest Rate Decision

What’s Expected:

Time of release: 04/04/2012 11:45 GMT, 7:45 EDT

Primary Pair Impact: EURUSD

Expected: 1.00%

Previous: 1.00%

DailyFX Forecast:1.00%

Why Is This Event Important:

Although market participants see the European Central Bank keeping the benchmark interest rate at 1.00%, the press conference with President Mario Draghi could drag on the EURUSD should the central bank head cast a weakened outlook for the region. Indeed, we’re going to keep a close eye on the ECB’s fundamental assessment as the region faces a risk for a prolonged recession, and dovish comments from Mr. Draghi could reinforce our bearish outlook for the euro as the sovereign debt crisis continues to drag on the real economy.

Recent Economic Developments

The Upside

Release

Expected

Actual

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

3.5%

3.6%

Euro-Zone Consumer Price Index Estimate (MAR)

2.5%

2.6%

Euro-Zone Consumer Price Index (YoY) (FEB)

2.7%

2.7%

The Downside

Release

Expected

Actual

Euro-Zone Unemployment Rate (FEB)

10.8%

10.8%

Euro-Zone Purchasing Manager Index Composite (MAR A)

49.6

48.7

Euro-Zone Gross Domestic Product (QoQ) (4Q P)

-0.3%

-0.3%

As the European Central Bank takes note of the stickiness in inflation, we may see the Governing Council soften its dovish tone for monetary policy, and the ECB may talk down speculation for additional monetary support as it maintains its one and only mandate to ensure price stability. However, as the ongoing weakness in the labor market paired with the downturn in production dampens the outlook for growth, we may see the central bank reduce its economic outlook for the region, and President Draghi may keep the door open to expand policy further in an effort to encourage a sustainable recovery.

Potential Price Targets For The Rate Decision

EURUSD_Trading_the_European_Central_Bank_Interest_Rate_Decision_body_04.png, EURUSD: Trading the European Central Bank Interest Rate Decision

A look at the encompassing structure shows the euro breaking below channel support dating back to the March 14th before encountering support at the 50-day moving average at 1.3215. The break, prompted by the release of the latest FOMC minutes, represents a significant reversal for the euro with daily support targets seen lower at the confluence of the 32.8% Fibonacci retracement taken form the January 16th advance and the 100-day moving average at 1.3155. Daily resistance now stands with former support at the 23.6% extension at 1.3280 backed by long trendline resistance dating back to the August 29th high, currently at 1.3380.

EURUSD_Trading_the_European_Central_Bank_Interest_Rate_Decision_body_04_1.png, EURUSD: Trading the European Central Bank Interest Rate Decision

Our 30min scalp chart shows the pair confirming the break below channel support before rebounding off the 1.3215 level cited earlier. A break here eyes subsequent support targets at the 23.6% Fibonacci extension taken from the March 14th and 22nd troughs at the 1.32-figure, 1.3180, 1.3160 and the March 22nd low at 1.3132. A compromise of this level negates the current Fibonacci setup with such a scenario eyeing targets at the 1.31-figure and 1.3065. Interim resistance stands at the 38.2% extension at 1.3240 backed by 1.3255, the 50% extension at 1.3275, and the 1.33-figure. Should the rate decision prompt a bearish response look to target downside levels with only a breach above 1.3380 negating our short-term bias.

How To Trade This Event Risk

As ECB President Mario Draghi is scheduled to speak at 12:30 GMT, trading the interest rate decision may not be as clear cut as some of our previous trades, but the policy statement may pave the way for a long Euro trade should the central bank soften its dovish tone for monetary policy. Therefore, if Mr. Draghi strikes a positive outlook for the region and curbs speculation for more easing, we will need to see a green, five-minute candle following the fresh batch of commentary to establish a buy entry on two-lots of EURUSD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in an effort to protect our profits.

However, as the ongoing weakness in the real economy heightens the risk for a prolonged recession, the ECB may sound a bit more dovish this time around, and the central bank head may continue to endorse its easing cycle in an effort to balance the risks surrounding the region. As a result, if the Governing Council curbs its outlook for growth and inflation, 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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAR 2012

03/08/2012 12:45 GMT

1.00%

1.00%

+17

+31

March 2012 European Central Bank Interest Rate Decision

EURUSD_Trading_the_European_Central_Bank_Interest_Rate_Decision_body_ScreenShot105.png, EURUSD: Trading the European Central Bank Interest Rate Decision

Indeed, the European Central Bank kept the benchmark interest rate at 1.00% in March, but soften its dovish tune for monetary policy as the Governing Council sees inflation staying above the 2% target throughout 2012. As the ECB shifts its focus to price stability, the remarks pushed the EURUSD back above 1.3300, but we saw the pair consolidate throughout the North American trade to end the day at 1.3271.

--- Written by David Song, Currency Analyst and Michael Boutros, Currency Strategist

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex.

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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