EUR/USD Stuck in Tight Range Ahead of ECB; Short-Squeeze on Tap?
- European Central Bank (ECB) to Adjust QE Program & Reduce Deposit-Rate.
- Will ECB President Mario Draghi Wait Until the March Meeting to Adjust Policy?
Trading the News: European Central Bank (ECB) Interest Rate Decision
Despite the ongoing easing cycle in the euro-area, the fresh rhetoric coming out of the European Central Bank (ECB) may spur a similar market reaction to the December interest rate decision as the Governing Council takes a more cautious approach in pushing monetary policy into uncharted territory.
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Why Is This Event Important:The deviating paths for monetary policy continues to encourage a long-term bearish outlook for EUR/USD especially as the Federal Reserve pledges to implement higher borrowing-costs in 2016 but, the single-currency may face another short squeeze should President Mario Draghi endorse a wait-and-see approach for the first-half of 2016.
Expectations: Bearish Argument/Scenario
|Industrial Production s.a. (MoM) (NOV)||-0.3%||-0.7%|
|Retail Sales (MoM) (NOV)||0.2%||-0.3%|
|Consumer Price Index Core (YoY) (DEC A)||1.0%||0.9%|
Waning outputs accompanied by the disinflationary environment across the euro-area may push the ECB to defy market expectations, and the euro-dollar stands at risk of resuming the downward trend should the Governing Council take additional steps to insulate the monetary union.
Risk: Bullish Argument/Scenario
|Construction Output (MoM) (NOV)||--||0.8%|
|Unemployment Rate (NOV)||10.7%||10.5%|
|Business Climate Indicator (DEC)||0.39||0.41|
Nevertheless, bright signs coming out of the real economy may push the ECB to the sidelines, and the Euro may face a similar reaction to the December rate decision should the central bank scale back its willingness to implement more non-standard measures.
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How To Trade This Event Risk(Video)
Bearish EUR Trade: ECB Boosts Bets for More Non-Standard Measures
- Need red, five-minute candle following the policy statement to consider a short EUR/USD trade.
- If market reaction favors a bearish Euro trade, sell EUR/USD with two separate position.
- Set stop at the near-by swing high/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.
Bullish EUR Trade: Governing Council Attempts to Buy Time
- Need green, five-minute candle to favor a long EUR/USD trade.
- Implement same strategy as the bearish euro trade, just in the opposite direction.
Potential Price Targets For The Release
Chart - Created Using FXCM Marketscope 2.0
- Even though the long-term outlook remains tilted to the downside, EUR/USD stands at risk of facing choppy prices ahead of the ECB rate decision as it remains stuck in a narrowing range; single-currency stands at risk for another short-squeeze should the central bank talk down bets for more monetary easing.
- The DailyFX Speculative Sentiment Index (SSI) shows retail crowd remains net-short EUR/USD since January 6, but the ratio remains off of recent extremes as it sits at -1.32, with 43% of traders long.
- Interim Resistance: 1.1052 (November high) to 1.1090 (50% retracement)
- Interim Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)
Impact that the ECB rate decision has had on EUR/USD during the last meeting
|Period||Data Released||Estimate||Actual||Pips Change||Pips Change|
|DEC 2015||12/03/2015 11:45 & 12:30 GMT||0.05%||0.05%||+297||+349|
December 2015 European Central Bank Interest Rate Decision
The European Central Bank (ECB) took additional steps to insulate the monetary union, with the Governing Council reducing the deposit rate to -0.3% from -0.2%, while extending the asset-purchase program to March 2017. The ECB also broadened the scope of its quantitative easing (QE) program, with the central bank to include local and regional debt in its non-standard measure. The disinflationary environment across the major industrialized economies may push the ECB to further embark on its easing cycle in 2016 as the council struggles to achieve its one and only mandate for price stability. Despite the new measures, the Euro strengthened against its major counterparts as the ECB failed to meet market expectations, with EUR/USD ending the day at 1.0940.
*As we approach the holidays and thus illiquid markets, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."
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--- Written by David Song, Currency Analyst and Shuyang Ren
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