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EUR/USD Weakness to Fizzle Should ECB Move Away From Rate-Cuts

EUR/USD Weakness to Fizzle Should ECB Move Away From Rate-Cuts

2016-04-21 07:00:00
David Song, Currency Strategist
Share:

- European Central Bank (ECB) Widely Anticipated to Retain Current Policy in April.

- Will ECB President Mario Draghi Adopt a More Aggressive Dovish Tone for Monetary Policy?

For more updates, sign up for David's e-mail distribution list.

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

The European Central Bank (ECB) interest rate decision may spur a limited market reaction following the meaningful easing packaged announced at the March 10 meeting, but further details surrounding the implementation on the non-standard measures may drag on EUR/USD as the Governing Council keeps the door open to further embark on its easing cycle.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:Even though ECB President Mario Draghi appears to have unintentionally put a floor on interest rates, a more aggressive dovish pledge to push monetary policy further into uncharted territory may dampen the appeal of the single-currency and spur a larger pullback in EUR/USD.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Trade Balance s.a. (FEB)

21.5B

20.2B

Sentix Investor Confidence (APR)

7.0

5.7

Economic Confidence (MAR)

103.8

103.0

Easing confidence accompanied by the slowdown in global growth may encourage the Governing Council to dig deeper into their tool chest, and a greater willingness to enlist more non-standard measures may spark a bearish reaction in EUR/USD amid the deviating paths for monetary policy.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (FEB)

0.0%

0.2%

Consumer Price Index Core (YoY) (MAR A)

0.9%

1.0%

M3 Money Supply (YoY) (FEB)

5.0%

5.0%

Nevertheless, signs of sticky price growth paired with the expansion in private-sector lending may prompt the ECB to endorse a wait-and-see approach, and more of the same from President Draghi and Co. may prop up the single-currency as market participants scale back bets for additional monetary support.

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Pledges More Aggressive Policy Easing

  • 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

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 appears to be in a bottoming-process as the Realtive Strength Index (RSI) largely preserves the bullish formation carried over from the previous year, and the euro-dollar may continue to retrace the decline from 2015 as it retains the advance following the ECB’s March 10 meeting.
  • 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.

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)

MAR

2016

03/10/2016 11:45 & 12:30 GMT

0.05%

0.00%

-107

+211

March 2016 European Central Bank Interest Rate Decision

EUR/USD Weakness to Fizzle Should ECB Move Away From Rate-Cuts

The European Central Bank (ECB) took further steps to insulate the monetary union in March, with the Governor Council unexpectedly lowering the benchmark interest rate to zero, while pushing the deposit rate down to -0.40% from -0.30%. In addition, the ECB expanding its asset-purchase program to EUR80B a month along with plans to introduce another Long-Term Refinance Operation (LTRO) that will begin in June 2016. However, ECB President Mario Draghi appears to have unintentionally put a floor on interest rates as the central bank head warned about implementing lower borrowing-costs. In turn, the selloff in EUR/USD following the initial announcement was short-lived, with the exchange rate snapping back during the press conference to end the day 1.1176.

Read More:

EUR/USD Retail FX Cling to Net-Short Positions Ahead of ECB Meeting

EUR/JPY Technical Analysis: The Negative Rate Trend Line is Back

EUR/USD and USD/CHF Outside Weeks at Well-Defined Levels

Big Test For Spoos, Big Test For the Markets

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

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

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