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ECB: Too Little, Too Late? EUR/USD Bears at Risk

ECB: Too Little, Too Late? EUR/USD Bears at Risk

2016-03-10 08:00:00
David Song, Shuyang Ren,
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- European Central Bank (ECB) Expected to Further Reduce Deposit-Rate, Adjust QE Program.

- Will ECB President Mario Draghi Continue to Endorse Dovish Outlook for Monetary Policy?

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

The European Central Bank (ECB) interest rate decision may drag on the single-currency and spark a near-term selloff in EUR/USD should President Mario Draghi and Co. push monetary policy further into unchartered territory.

What’s Expected:

EUR/USD ECB

Click Here for the DailyFX Calendar

Why Is This Event Important:

The ongoing easing cycle in the euro-area may continue to foster a long-term bearish outlook for EUR/USD especially as the Federal Reserve appears on course to implement higher borrowing-costs, but the euro-dollar stands at risk of facing a similar market reaction to the December interest rate decision should the Governing Council fail to meet market expectations.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Sentix Investor Confidence (MAR)

8.3

5.5

Producer Price Index (YoY) (JAN)

-2.9%

-2.9%

Consumer Price Index Core (YoY) (FEB A)

0.9%

0.7%

Waning confidence paired with slowing inflation may encourage the ECB to ramp up its non-standard measures, and a lower deposit rate accompanied by a meaningful adjustment to the quantitative easing (QE) program may trigger a bearish reaction in EUR/USD amid the deviating paths for monetary policy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (JAN)

0.1%

0.4%

Unemployment Rate (JAN)

10.4%

10.3%

M3 Money Supply (YoY) (JAN)

4.7%

5.0%

Nevertheless, the expansion in private lending along with the improvement in the labor market may keep the ECB on the sidelines, and more of the same from President Draghi & Co. may boost the appeal of the single-currency as market participants scale back bets for a more aggressive easing program.

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Delivers Deposit Rate-Cut Along with Expansion & Extension of QE

  • 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 Disappoints, Tries to Buy More 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

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Even though the diverging paths for monetary policy fosters a long-term bearish outlook for EUR/USD, the pair may continue to consolidate with the broad range carried over from 2015 as market participants continue to mull the timing of the next Fed rate-hike.
  • Interim Resistance: 1.1510 (50% retracement) to 1.1520 (61.8% expansion)
  • Interim Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

EUR/USD SSI
  • According to the DailyFX Speculative Sentiment Index (SSI), the retail FX crowd as been net-short EUR/USD since March 3, with the ratio marking an extreme reading in February as it slipped to -2.00.
  • The ratio has appears to be working its way back towards recent extremes as it falls to -1.32 ahead of the ECB, with 43% of traders now long.

Why and how do we use the SSI in trading? View our video and download the free indicator here

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)

JAN 2016

01/21/2016 11:45 & 12:30 GMT

0.05%

0.05%

-77

-17

January 2016 European Central Bank Interest Rate Decision

EUR/USD Chart

The European Central Bank (ECB) stuck to its current policy in January after cutting the deposit rate and adjusting the quantitative easing (QE) at the end of 2015. Nevertheless, ECB President Mario Draghi continued to highlight a dovish outlook for monetary policy as the central bank warns of increased downside risks surrounding the monetary union, and the Governing Council may look to implement more non-standard measures in 2016 as it struggles to achieve its one and only mandate for price stability. The Euro struggled to hold its ground following the dovish comments from President Draghi’s, but EUR/USD bounced back during the North American trade to end the day at 1.0871.

Read More:

Another Big Test Awaits USD/CAD

DailyFX Technical Focus: Nikkei 225 at Resistance

USD/JPY Technical Analysis: The Core FX Pair In The Risk ParadigmUSDOLLAR: Key Levels to Know Heading into NFPs, March Open

Get our top trading opportunities of 2016 HERE

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

--- 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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