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Upbeat ECB Risks Larger EUR/USD Advance- 1.1300 in Focus

Upbeat ECB Risks Larger EUR/USD Advance- 1.1300 in Focus

David Song, Shuyang Ren,

- European Central Bank (ECB) to Keep Rates on Hold, Preserve EUR 60B QE Program.

- Will ECB President Mario Draghi Continues Speak Out Against a ‘Taper Tantrum?’

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

The fresh batch of rhetoric coming out of the European Central Bank (ECB) may boost the appeal of the single-currency and spur a further advance in EUR/USD should the Governing Council adopt an improved outlook for the monetary union.

What’s Expected:

EUR/USD ECB

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Why Is This Event Important:Data prints highlighting a stronger recovery in Europe may encourage the ECB to strike a more upbeat tone this time around, but the threat for a ‘taper tantrum’ in the euro-area may push Mr. Draghi to cast a dovish outlook for monetary policy as the central bank head pledges to carry out the easing cycle until at least September 2016.

Expectations: Bullish Argument/Scenario

ReleaseExpectedActual
Core Consumer Price Index (YoY) (MAY A)0.7%0.9%
M3 Money Supply (YoY) (APR)4.9%5.3%
Gross Domestic Product (YoY) (1Q A)1.0%1.0%

Faster price growth paired with the pickup in lending for small and medium-sized enterprises (SME) may prompt the Governing Council to soften its dovish tone, and the ECB hawks may look to halt the easing cycle ahead of schedule as the positive developments highlight an improved outlook for growth and inflation.

Risk: Bearish Argument/Scenario

ReleaseExpectedActual
Purchasing Manager Index- Composite (MAY P)53.953.4
Trade Balance s.a. (MAR)21.9B19.7B
Retail Sales (MoM) (MAR)-0.7%-0.8%

Nevertheless, the ECB may retain a cautious outlook for the region amid waning demand from home and abroad, and President Draghi may largely preserve his pledge to fully implement the quantitative easing (QE) program in an effort to encourage a stronger recovery.

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How To Trade This Event Risk(Video)

Bullish EUR Trade: ECB Softens Dovish Tone & Adopts Improved Outlook

  • Need green, five-minute candle following the policy announcement to consider a long EUR/USD trade.
  • If market reaction favors a bullish Euro trade, buy EUR/USD with two separate position.
  • Set stop at the near-by swing low/reasonable distance from cost; need 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: ECB Sticks to Easing Cycle & Talks Down ‘Taper Tantrum’

  • 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:

Price & Time: Kiwi Nearing Key Pivot Zone

EUR/USD Rebound to Face ECB- GBP/USD Breaks Out Ahead of BoE

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • EUR/USD may face a move into 1.1300 (78.6% retracement) on a close above 1.1120 (61.8% retracement), but the policy divergence should continue to cast a long-term bearish outlook for the pair as the ECB continues to embark on its easing cycle.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail FX crowd has ramped up their net-short EUR/USD position during the first full-week of June as the ratio slips to -2.15.
  • Interim Resistance: 1.1180 (23.6% expansion) to 1.1210 (61.8% retracement)
  • Interim Support: 1.0850 (78.6% expansion) to 1.0870 (38.2% retracement)

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

PeriodData ReleasedEstimateActualPips ChangePips Change
APR 201504/15/2015 11:45 & 12:30 GMT0.05%0.05%+19+91

April 2015 European Central Bank Interest Rate Decision

EUR/USD Chart

The European Central Bank (ECB) stuck to its current policy in April, and it seems as though the Governing Council will retain a wait-and-see approach over the coming months as President Mario Draghi sees the non-standard measures starting to have a positive impact on the Euro-Zone economy. Despite the positive data prints coming out of the region, Mr. Draghi pledged to fully implement the QE program through September 2016 in an effort to achieve its one and only mandate to achieve price stability. The initial market reaction to the announcement was limited, with EUR/USD fluctuating between 1.0600 and 1.0700 during the North American trade, and ending the day at 1.0684.

--- 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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