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EURUSD to Target Key Low on ECB Easing Cycle, Verbal Intervention

EURUSD to Target Key Low on ECB Easing Cycle, Verbal Intervention

David Song, Gregory Marks,

- Broad Views Surrounding European Central Bank (ECB)- Are They Priced-In?

- President Mario Draghi to Implement Verbal Intervention?

Trading the News: European Central Bank Interest Rate Decision

According to a Bloomberg News survey, 62 of the 66 economists polled see the European Central Bank (ECB) largely maintaining its current policy this month, but the broad range of expectations (rate cut, negative deposit rates, verbal intervention, non-standard measures) may produce increased volatility around the event as market participants weigh the outlook for monetary policy.

What’s Expected:

Time of release: 02/06/2014 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:

Indeed, the ECB remains poised to further embark on its easing cycle amid the heightening threat for deflation, while central bank President Mario Draghi may look to verbally weaken the single currency in an effort to further insulate the monetary union.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Euro-Zone Retail Sales (MoM) (DEC)

-0.7%

-1.6%

Euro-Zone Producer Price Index (YoY) (JAN A)

-0.8%

-0.8%

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

0.9%

0.7%

Subdue growth and inflation certainly raises the risk of seeing the ECB surprise with more easing, but even a further willingness to implement additional monetary support could be enough to spark a sharp selloff in the EURUSD amid the protracted recovery in the euro-area.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Euro-Zone ZEW Survey- Expectations (JAN)

--

73.3

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

1.4%

1.8%

Euro-Zone Industrial Production s.a. (MoM) (NOV)

1.4%

1.8%

Nevertheless, the ECB may merely stress a more dovish twist to its forward-guidance as there appears to be a growing rift with the Governing Council, and a neutral policy stance may help the euro to sustain a larger rebound as market participants delay their 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

DailyFX on Demand Will Have Full Coverage of the ECB Meeting

Bearish EUR Trade: ECB Loosens Policy and/or Publishes Detailed 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 Highlights Neutral 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_EURUSD_to_Target_Key_Low_on_ECB_Easing_Cycle_Verbal_Intervention_body_Picture_3.png, EURUSD to Target Key Low on ECB Easing Cycle, Verbal Intervention

Chart - Created Using FXCM Marketscope 2.0

  • Descending Channel within Bearish Trend from 2008; Nov. Low (1.3294) in Focus
  • Bearish Relative Strength Index Continues to Favor Downside Target
  • Interim Resistance: 1.3800 (100.0 expansion) to 1.3830 (61.8 retracement)
  • Interim Support: 1.3450 (38.2% retracement) to 1.3460 (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)

JAN 2014

01/09/2014 12:45 GMT

0.25%

0.25%

+22

+5

January 2013 European Central Bank Interest Rate Decision

Forex_EURUSD_to_Target_Key_Low_on_ECB_Easing_Cycle_Verbal_Intervention_body_Picture_2.png, EURUSD to Target Key Low on ECB Easing Cycle, Verbal Intervention

Although the Euro was well supported following the January rate decision, Draghi’s presser at 13:30GMT led to a weaker Euro in the afternoon session and the EUR/USD pair closed out almost flat at the daily close. Mr. Draghi put forth revised ECB forecasts for GDP and inflation and noted that the Euro Area may face a prolonged period of low inflation. It is possible that at this meeting we will see strong comments, and possibly some sort of verbal intervention, on the back of weaker than expected CPI readings out of Germany last week. The ECB is likely wary of continued disinflation in Europe’s strongest economy and the central bank may feel the need to finally take some sort of action.

Forex_EURUSD_to_Target_Key_Low_on_ECB_Easing_Cycle_Verbal_Intervention_body_Picture_1.png, EURUSD to Target Key Low on ECB Easing Cycle, Verbal Intervention

--- Written by David Song, Currency Analyst and Gregory Marks

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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