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Euro to Preserve 2008 Bear Trend on Dovish ECB Rhetoric

Euro to Preserve 2008 Bear Trend on Dovish ECB Rhetoric

2014-01-09 08:00:00
David Song, Gregory Marks,
Share:

- European Central Bank (ECB) to Retain Current Policy & Forward-Guidance

- President Mario Draghi to Highlight Threat for Disinflation?

Trading the News: European Central Bank Interest Rate Decision

The European Central Bank (ECB) may help to prop up the single currency as the Governing Council is widely expected to keep the benchmark interest rate on hold while preserving its forward-guidance for monetary policy.

What’s Expected:

Time of release: 01/09/2014 12:45 GMT, 7:45 EST

Primary Pair Impact: EURUSD

Expected: 0.25%

Previous: 0.25%

DailyFX Forecast: 0.25%

Why Is This Event Important:

A further delay in the ECB’s easing cycle may instill a bullish outlook for the EURUSD as President Mario Draghi retains a wait-and-see approach, but the single currency may struggle to hold its ground should the central bank head highlight a greater risk for disinflation.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Euro-Zone Unemployment Rate (NOV)

12.1%

12.1%

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

0.8%

0.7%

Euro-Zone Employment (QoQ) (3Q)

--

0.0%

The ECB may show a greater willingness to implement more non-standard measures over the near-term amid the ongoing weakness in the labor market paired with the growing threat for disinflation, and a more-dovish policy statement may drag on the single currency as President Mario Draghi retains a cautious outlook for the region.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Euro-Zone Retail Sales (MoM) (NOV)

0.1%

1.4%

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

14.5B

14.5B

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

51.9

52.1

However, the ECB may adopt a more neutral tone this time around as the central bank anticipates a more meaningful recovery in 2014, and the Euro may trade on a firmer footing should the Governing Council talk down bets for additional monetary support.

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

Join DailyFX on Demand for Full Coverage of the ECB Meeting

Bearish EUR Trade: ECB Provides More Detailed Monetary Easing Timeline

  • Need red, five-minute candle following the decision/statement to consider a short Euro trade
  • If market reaction favors a short trade, sell EURUSD with two separate position
  • Set stop at the near-by swing high/reasonable distance from cost; 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: Governing Council to Further Delay Easing Cycle

  • 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_Euro_to_Preserve_2008_Bear_Trend_on_Dovish_ECB_Rhetoric_body_Picture_2.png, Euro to Preserve 2008 Bear Trend on Dovish ECB Rhetoric

Chart - Created Using FXCM Marketscope 2.0

  • Struggling to Hold Trendline Support; Preserves Bearish Trend from 2008
  • Bearish Relative Strength Index Continues to Take Shape
  • Interim Resistance: 1.3800 (100% expansion) to 1.3830 (61.8% retracement)
  • Interim Support: 1.3490 (50.0% retracement) to 1.3500 Pivot

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)

DEC 2013

12/05/2013 12:45 GMT

0.25%

0.25%

-3.8

+80

December 2013 European Central Bank Interest Rate Decision

Forex_Euro_to_Preserve_2008_Bear_Trend_on_Dovish_ECB_Rhetoric_body_Picture_1.png, Euro to Preserve 2008 Bear Trend on Dovish ECB Rhetoric

Following a 25bps cut of the ECB’s key benchmark interest rate in November, the central bank left rates unchanged at 0.25% in November. Price action in EUR/USD was almost unchanged following the announcement as traders awaited key US GDP data for the third quarter at 13:30GMT that day. The December announcement was key to the Euro moving forward in that Mr. Draghi presented new ECB inflation and GDP forecasts for 2014 and 2015. Although the central bank president upped GDP estimated by a tenth of a percent to 1.1% for this year, inflation forecasts were lowered from 1.3% to 1.1% for 2014. The European Central Bank continues to face the threat of disinflation moving into the new year and non-standard measures may have to be enacted in the coming months as the Federal Reserve steps back from its asset purchase program, QE3. As the ECB’s only mandate is price stability, market participants cannot underestimate the measures that the central bank may have to enact in order to protect healthy inflation rates. European Central Bank members have openly stated that negative deposit facility rates and further benchmark interest rate cuts remain on the table.

--- 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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