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Forex: EUR/USD- Trading the European Central Bank (ECB) Rate Decision

Forex: EUR/USD- Trading the European Central Bank (ECB) Rate Decision

2012-12-06 03:30:00
David Song, Strategist
Share:

Trading the News: European Central Bank Interest Rate Decision

What’s Expected:

Time of release: 12/06/2012 12:45 GMT, 7:45 EST

Primary Pair Impact: EURUSD

Expected: 0.75%

Previous: 0.75%

DailyFX Forecast: 0.75%

Why Is This Event Important:

Beyond the European Central Bank (ECB) interest rate decision, market participants are likely to show a greater reaction to the press conference with President Mario Draghi amid the fresh batch of central bank rhetoric, and the policy statement may drag on the exchange rate should it hint at additional monetary support. With the Outright Monetary Transactions program in place to help tackle the debt crisis, the Governing Council may look to target the benchmark interest rate in 2013 as the deepening recession in the euro-area threatens the outlook for price stability. As the ECB sees inflation slipping below the 2% target in the following year,

Recent Economic Developments

The Upside

Release

Expected

Actual

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

2.5%

2.6%

Euro-Zone Economic Confidence (NOV)

84.5

85.7

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

9.5B

11.3B

The Downside

Release

Expected

Actual

Euro-Zone Retail Sales (OCT)

-0.2%

-1.2%

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

2.4%

2.2%

Euro-Zone Unemployment Rate (OCT)

11.7%

11.7%

As the euro-area continues to benefit from global trade, sticky price growth paired with the rebound in confidence may encourage the ECB to strike a more neutral tone for monetary policy, and we may see the Governing Council move to the sidelines as the region is expected to return to growth in the second-half of 2013. However, record-high unemployment along with the deepening contraction in private sector consumption may produce a prolonged recession in the euro-area, and the central bank may push borrowing costs to a fresh record-low in an effort to stem the downside risks surrounding the region.

Potential Price Targets For The Rate Decision

Forex_EURUSD-_Trading_the_European_Central_Bank_ECB_Rate_Decision_body_ScreenShot112.png, Forex: EUR/USD- Trading the European Central Bank (ECB) Rate Decision

As the EURUSD appears to have made another failed attempt to make a meaningful move above the 1.3120 figure – the 38.2% Fibonacci retracement from the 2009 high to the 2010 low – the triple top around the key figure looks poised to play out in the coming days as the relative strength index comes off of overbought territory. In turn, a dovish statement from the ECB could serve as the fundamental catalyst to spark a short-term reversal in the exchange rate, and we will be looking for a move back towards the 23.6% Fib (1.2640-50) should the Governing Council carry its easing cycle into the following year.

How To Trade This Event Risk

Trading the ECB rate decision may not be as clear cut as some of our previous trades as the central bank sticks to its current policy, but a less dovish policy statement may pave the way for a long Euro trade as market participants scale back bets for additional monetary support. Therefore, if President Draghi talks down speculation for a rate cut, we will need a green, five-minute candle following his statements to generate a long entry on two-lots of EURUSD. 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 target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the firs trade hits its mark in an effort to preserve our profits.

In contrast, the Governing Council may weigh additional measures to address the downside risks for the economy amid the weakening outlook for growth and inflation, and we may see the central bank carry its easing cycle into the following year as the region faces a deepening recession. As a result, if the ECB shows a greater willingness to target the benchmark interest rate, we will implement 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)

NOV 2012

11/08/2012 12:45 GMT

0.75%

0.75%

+4

-18

November 2012 European Central Bank Interest Rate Decision

Forex_EURUSD-_Trading_the_European_Central_Bank_ECB_Rate_Decision_body_ScreenShot111.png, Forex: EUR/USD- Trading the European Central Bank (ECB) Rate Decision

Although the European Central Bank (ECB) kept the benchmark interest rate at 0.75%, President Mario Draghi held a rather dovish tone for monetary policy as the debt crisis heightens the risk for a prolonged recession in the euro-area. In turn, the cautious outlook held by the ECB dragged on the exchange rate, with the EURUSD slipping back below the 1.2750 figure, but we saw the single currency consolidate throughout the North American trade as the pair ended the day at 1.2745.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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