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ECB to Reduce QE- Euro Vulnerable to Dovish Draghi

ECB to Reduce QE- Euro Vulnerable to Dovish Draghi

David Song, Strategist

- European Central Bank (ECB) to Retain Zero-Interest Rate Policy (ZIRP), Narrow QE Program.

- Will the Governing Council Increase Its Efforts to Ward Off a Taper-Tantrum?

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

DailyFX Calendar

The European Central Bank (ECB) is widely expected to retain the zero-interest rate policy (ZIRP) as it struggles to achieve its one and only mandate for price stability, but the Governing Council may sound more dovish this time around in an effort to ward off a ‘taper tantrum.’

Why Is This Event Important:With the ECB on course to narrow its asset-purchases to EUR 60B/month, the central bank may continue to reduce its quantitative easing (QE) program ahead of the December 2017 deadline, but President Mario Draghi and Co. may increase their efforts to tame market speculation as the growth outlook for the Euro-Zone remains tilted to the downside. With that said, the Governing Council may keep the door open to further extend its non-standard measures in order to encourage a stronger recovery.

Have a question about the currency markets? Join a Trading Q&A webinar and ask it live!

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (MAR A)

0.8%

0.7%

Economic Confidence (MAR)

108.3

107.9

Gross Domestic Product s.a. (YoY) (4Q P)

1.8%

1.7%

Waning confidence paired with soft inflation may encourage the ECB to further support the monetary union, and the Euro may give back the advance following the French election should the central bank show a greater willingness to carry the QE program beyond the December 2018 deadline.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Purchasing Manager Index- Composite (APR P)

56.4

56.7

Construction Output (MoM) (FEB)

--

6.9%

Retail Sales (MoM) (FEB)

0.5%

0.7%

Nevertheless, the pickup in private-sector activity accompanied by the ongoing expansion in the trade balance may push the ECB to adopt an improved outlook for the euro-area, and the Euro may stage a larger advance over the coming days should the Governing Council show a greater willingness to move away from its easing-cycle.

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Shows Greater Willingness to Further Extend QE Program

  • Need a red, five-minute candle following the central bank rate decision/press conference to favor a short EUR/USD trade.
  • If market reaction favors a short 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 Softens Dovish Tone, Highlights Improved Outlook

  • 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

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • The near-term outlook for EUR/USD remains constructive as it clears the interim resistance zone around 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion) and appears to be making a more meaningful attempt to break out of the downward trend carried over from the previous year; however, the Relative Strength Index (RSI) highlights the risk for a pullback as the oscillator struggles to push into overbought territory.
  • Interim Resistance: 1.1140 (23.6% expansion) to 1.1160 (38.2% expansion)
  • Interim Support: 1.0470 (38.2% expansion) to 1.0500 (50% expansion)

Make Sure to Check Out the DailyFX Guides for Additional Trading Ideas!

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

2017

03/09/2017 12:45 & 13:30 GMT

0.00%

0.00%

+43

+26

March 2017 European Central Bank Interest Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

The European Central Bank (ECB) stuck to the sidelines in March, but kept the door open to further extend its easing-cycle as ‘a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed the need for a continued very substantial degree of monetary accommodation to secure a sustained return of inflation rates towards levels that are below, but close to, 2% without undue delay.’ It seems as though the ECB will endorse a wait-and-see approach for the foreseeable future as ‘the risks surrounding the euro area growth outlook have become less pronounced,’ but the Governing Council may continue to highlight a dovish outlook for monetary policy even as the central bank plans to reduce its asset-purchases to €60B/month starting in April. The Euro edged higher following the rate decision, but the market reaction was short-lived, with EUR/USD paring the advance to close the day at 1.0576.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, please follow this link.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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