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EUR/USD to Face Short-Squeeze/Profit-Taking If ECB Fails to Act

EUR/USD to Face Short-Squeeze/Profit-Taking If ECB Fails to Act

2014-09-04 08:00:00
David Song, Shuyang Ren,
Share:

- European Central Bank (ECB) Largely Expected to Maintain Current Policy.

- Will Governing Council Show Greater Willingness for Quantitative Easing (QE)?

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Trading the News: European Central Bank (ECB) Interest Rate Decision

Despite expectations of seeing the European Central Bank (ECB) further embark on its easing cycle, the EUR/USD may face a short-squeeze should the Governing Council retain its current approach for monetary policy.

What’s Expected:

EUR/USD ECB

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Why Is This Event Important:Indeed, there’s speculation that the ECB will cut interest rates further or even announce a more detailed asset-backed security (ABS) purchasing program amid the ongoing weakness in the monetary union, but the Governing Council may stick to the sidelines as President Mario Draghi continues to see a moderate recovery in the euro-area.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (AUG A)

0.8%

0.9%

Unemployment Rate (AUG)

11.5%

11.5%

Business Climate Indicator (AUG)

0.10

0.16

The stickiness in core inflation paired with lower unemployment may encourage the ECB to retain its current policy throughout 2014, and the EUR/USD may finally fill-in the gap from the end of August should the Governing Council make an attempt to buy more time.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (JUL)

-0.3%

-0.4%

Gross Domestic Product s.a. (QoQ) (2Q A)

0.1%

0.0%

Industrial Production s.a. (JUN)

0.4%

-0.3%

Nevertheless, the ECB may implement additional monetary support amid the persistent weakness in the real economy, and the EUR/USD may continue to press fresh 2014 lows should the central bank loosen policy further.

Join DailyFX on Demand to Cover the Entire ECB Rate Decision!

How To Trade This Event Risk(Video)

Bullish EUR Trade: ECB Refrains From Implementing Additional Monetary Support

  • Need green, five-minute candle following the policy statement to consider a long EUR/USD position
  • If market reaction favors a long trade, buy EUR/USD with two separate position
  • Set stop at the near-by swing low/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

Bearish EUR Trade: Governing Council Favors Further Non-Standard Measures

  • Need red, five-minute candle to favor a short EUR/USD trade
  • Implement same strategy as the bullish euro trade, just in the opposite direction

Read More:

COT: Euro and Yen Positioning Near Record Levels

Price & Time: The "Most Loved Rally in History"

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Remains at Risk for a Further Decline as the RSI Continues to Hold in Oversold Territory
  • Interim Resistance: 1.3350 (61.8% expansion) to 1.3370 (50.0% retracement)
  • Interim Support: 1.3090 (38.2% expansion) to 1.3100 Pivot

Impact that the ECB rate decision has had on EUR/USD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

AUG

08/07/2014 11:45 GMT

0.15%

0.15%

+2

-19

August 2014 European Central Bank Interest Rate Decision

EUR/USD Chart

The European Central Bank kept the benchmark interest rate unchanged at 0.15% even as it saw a moderate and uneven recovery in the euro-area. However, ECB President Mario Draghi went onto say that the central bank had intensified the preparatory work for outright purchase of asset-backed securities (ABS), which suggests the ECB may embark on quantitative easing (QE) sooner rather than later. Despite the limited reaction, the EUR/USD largely struggled to hold its ground during the North American trade, with the pair ending the day at 1.3355.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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