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Bullish Euro Momentum Wanes Ahead of ECB- Key Reversal on Tap?

Bullish Euro Momentum Wanes Ahead of ECB- Key Reversal on Tap?

David Song, Strategist

- European Central Bank (ECB) to Stay on Hold; Utilize Forward Guidance

- President Mario Draghi Has Hinted at Another Long-Term Refinancing Operation (LTRO)

Trading the News: European Central Bank Interest Rate Decision

The European Central Bank (ECB) is expected to keep the benchmark interest rate at 0.50% as the monetary union returns to growth, but President Mario Draghi may show a greater willingness further embark on the easing cycle in an effort to encourage a stronger recovery.

What’s Expected:

Time of release: 10/02/2013 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:

During his testimony in front of the European Parliament, President Draghi argued that the central bank could implement another LTRO if needed, and the Governing Council may sounds more dovish this time around amid the growing threat for deflation.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Euro-Zone Consumer Price Index (YoY) (SEP A)

1.2%

1.1%

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

15.0B

11.1B

Euro-Zone Employment (2Q)

--

-0.1%

There could be a greater discussion for more non-standard measures at this month’s meeting as the persistent slack in the real economy threatens price stability, and any signals highlighting additional monetary support is likely to dampen the appeal of the Euro as market participants weigh the outlook for monetary policy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Euro-Zone Economic Confidence (SEP)

96.0

96.9

Euro-Zone Purchasing Manager Index- Composite (SEP A)

51.8

52.1

Euro-Zone Construction Output (MoM) (JUL)

--

0.3%

However, the ECB may merely reiterate the policy statement from the September meeting amid the bright signs coming out of the region, and a more neutral tone may spark fresh monthly highs in the Euro as FX traders scale back bets for more easing.

How To Trade This Event Risk(Video)

*Trading the ECB interest rate decision may not be as clear cut as some of our other trade setups as the press conference with President Draghi ends with a Q&A session

Bearish EUR Trade: ECB Sees More Non-Standard Measures on Tap

  • Need to see red, five-minute candle following the decision/statement to consider a short EURUSD trade
  • If market reaction favors a short Euro trade, sell EURUSD with two separate position
  • Place stop at the near-by swing high/reasonable distance from cost; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is met, set reasonable limit

Bullish EUR Trade: Draghi Shows Greater Willingness to Retain Current Policy

  • Need green, five-minute candle to favor a long EURUSD trade
  • Implement same strategy as the bearish euro trade, just in the opposite direction

Potential Price Targets For The Rate Decision

EURUSD Daily

Forex_Bullish_Euro_Momentum_Wanes_Ahead_of_ECB-_Key_Reversal_on_Tap_body_Picture_2.png, Bullish Euro Momentum Wanes Ahead of ECB- Key Reversal on Tap?

Chart - Created Using FXCM Marketscope 2.0

  • Marks Eight Failed Attempts to Close Above 1.3530-40 (61.8% expansion)
  • Relative Strength Index Holds Below 70 After Breaking Bullish Trend
  • Interim Resistance: 1.3650-60 (78.6% expansion)
  • Interim Support: 1.3450-60 (50.0% expansion)

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)

SEP 2013

09/05/2013 11:45 GMT

0.50%

0.50%

-39

-89

September 2013 European Central Bank Interest Rate Decision

Forex_Bullish_Euro_Momentum_Wanes_Ahead_of_ECB-_Key_Reversal_on_Tap_body_ScreenShot170.png, Bullish Euro Momentum Wanes Ahead of ECB- Key Reversal on Tap?

The European Central Bank struck a rather cautious tone for the euro-area after keeping the benchmark interest rate on hold at 0.50%, with President Mario Draghi reiterating his pledged to retain the highly accommodative policy stance for an ‘extended’ period of time amid the ongoing weakness in the real economy. The dovish commentary coming out of the central bank dragged on the Euro, with the EURUSD falling below the 1.3200 handle, and the single currency continued to lose ground throughout the day as the pair closed at 1.3118.

--- Written by David Song, Currency Analyst

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

Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, please follow this link

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