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EURUSD- Trading the European Central Bank (ECB) Rate Decision

EURUSD- Trading the European Central Bank (ECB) Rate Decision

David Song, Strategist

Trading the News: European Central Bank Interest Rate Decision

What’s Expected:

Time of release: 08/01/2013 11:45 GMT, 7:45 EDT

Primary Pair Impact: EURUSD

Expected: 0.50%

Previous: 0.50%

DailyFX Forecast: 0.50%

Why Is This Event Important:

The European Central Bank (ECB) interest rate decision may weigh on the single currency as the Governing Council adopts forward-guidance for monetary policy, but the fresh batch of central bank rhetoric may drag on the single currency should President Mario Draghi show a greater willingness to further embark on the easing cycle. As the euro-area remains mired in recession, the ECB may allude to additional rate cuts down the road, and Mr. Draghi may sounds more dovish this time around as the outlook for growth and inflation remains weak.

Recent Economic Developments

The Upside/Bullish Scenario

Release

Expected

Actual

Euro-Zone Economic Confidence (JUL)

92.5

92.5

Euro-Zone Purchasing Manager Index Composite (JUL A)

49.1

50.4

Euro-Zone Retail Sales (MoM) (MAY)

0.3%

1.0%

The ECB may continue to call for a recovery later this year as confidence in the euro-area picks up, and a more neutral policy statement may set the tone for a short-term rally in the EURUSD as market participants scale back bets for more central bank support.

The Downside/Bearish Scenario

Release

Expected

Actual

Euro-Zone Unemployment Rate (JUN)

12.2%

12.1%

Euro-Zone Consumer Price Index Core (YoY) (JUL A)

1.2%

1.1%

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

16.2B

14.6B

As the ECB looks for an export-led recovery, the ECB may look to limit the upside in the single currency, and we may see the Euro struggle to hold its ground should the Governing Council may show a greater willingness to implement more non-standard measures.

Potential Price Targets For The Rate Decision

Forex_EURUSD-_Trading_the_European_Central_Bank_ECB_Rate_Decision_body_ScreenShot220.png, EURUSD- Trading the European Central Bank (ECB) Rate Decision

As the EURUSD struggles to clear the 61.8% Fibonacci retracement from the February decline (1.3340), the pair looks poised to consolidate ahead of the ECB interest rate decision, but we may see a run at the June high (1.3415) should President Draghi strike a more upbeat tone for the monetary union. However, should the central bank show a greater willingness to embark on its easing cycle, the EURUSD may struggle to maintain the rebound from July (1.2754), and the single currency may work its way back towards the 23.6% retracement (1.2640-50) over the near to medium-term as market participants increase bets for additional monetary support.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as the Governing Council is widely expected to retain its current policy, but the fresh batch of central bank rhetoric may set the stage for a long Euro trade should the ECB sound more upbeat this time around. Therefore, if President Draghi strikes an improved outlook and adopts a more neutral tone for monetary policy, we will need a green, five-minute candle following the statement 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 first trade hits its mark in an effort to protect our profits.

On the other hand, the Governing Council may turn increasingly cautious towards the economy as the region struggles to return to growth, and the ECB may show a greater willingness to ease policy further in order to pull the region out of recession. As a result, if Mr. Draghi surprises with a rate cut or talks up bets for additional monetary support, we will implement the same strategy for a short euro-dollar trade as the long position laid out above, but 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)

JUL 2013

07/04/2013 11:45 GMT

0.50%

0.50%

-88

-77

July 2013 European Central Bank Interest Rate Decision

Forex_EURUSD-_Trading_the_European_Central_Bank_ECB_Rate_Decision_body_ScreenShot218.png, EURUSD- Trading the European Central Bank (ECB) Rate Decision

Although the European Central Bank stuck to its current policy in July, the Governor Council pledged to keep interest rates low for an ‘extended period’ of time as the monetary union remains mired in recession. Indeed, the ECB’s forward-guidance for monetary policy dragged on the Euro, with the EURUSD dipping below the 1.2900 handle, but we saw the pair consolidate during the holiday trade as it ended the day at 1.2912.

--- Written by David Song, Currency Analyst

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

Follow me on Twitter at @DavidJSong

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