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Trading the News: European Central Bank (ECB) Interest Rate Decision - ECB to Keep Rates on Hold, Will ECB Show a Greater Willingness for Quantitative Easing?

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by , 12-04-2014 at 09:42 AM (937 Views)
      
   
Trading the News: European Central Bank (ECB) Interest Rate Decision

EUR/USD may continue to mark fresh monthly lows over the next 24-hours of trade should the European Central Bank (ECB) take additional steps to further support the monetary union.

What’s Expected:

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Why Is This Event Important:

Indeed, there’s growing speculation that the Governing Council will broaden the scope of its non-standard measures while implementing a large-scale quantitative easing (QE) program to better achieve its one and only mandate for price stability, and the single currency remains at risk of facing additional headwinds in 2015 as the outlook for growth and inflation remains subdued.

Expectations: Bearish Argument/Scenario

Release Expected Actual
Producer Price Index (MoM) (OCT) -0.3% -0.4%
Retail Sales (MoM) (OCT) 0.5% 0.4%
Consumer Price Index Core (YoY) (NOV A) 0.7% 0.7%

Waning inflation expectations paired with the persistent slack across the monetary union may prompt the ECB to further embark on its easing cycle, and we may see ECB President Mario Draghi continue to strike a dovish tone in 2015 in an effort to encourage a more sustainable recovery.

Risk: Bullish Argument/Scenario

Release Expected Actual
Economic Confidence (NOV) 100.3 100.8
Trade Balance s.a. (SEP) 16.0B 17.7B
Gross Domestic Product s.a. (QoQ) (3Q A) 0.1% 0.2%

Nevertheless, the ECB may merely reiterate the policy statement from the November 6 meeting as the central bank gauges the impact of the targeted Long-Term Refinancing Operations (T-LTRO), and we may see a relief rally in EUR/USD should the Governing Council make an attempt to buy more time.

How To Trade This Event Risk

Bearish EUR Trade: ECB Implements Additional Monetary Support

  • Need red, five-minute candle following the updated forward-guidance to consider 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; 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 Looks 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
EUR/USD Daily Chart

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  • Will retain the approach to sell-bounces in EUR/USD as the bearish RSI break takes shape.
  • Interim Resistance: 1.2600 pivot to 1.2610 (61.8% expansion)
  • Interim Support: 1.2280 (100% expansion) to 1.2290 (38.2% expansion)

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)
NOV 2014 11/06/2014 11:45 GMT 0.05% 0.05% -99 -149

The European Central Bank (ECB) held the benchmark rate steady at the record low of 0.05% for another month, while pledging to provide additional monetary stimulus if needed amid the weakening outlook for growth and inflation. Moreover, ECB President Mario Draghi noted that the ECB will start buying asset-backed securities (ABS) in the coming days and may look to incorporate purchases of private-sector debt and even government bonds in order to achieve a EUR 1T expansion of its balance sheet. As a result, the ECB may sound increasingly dovish going into 2015 as the central bank struggles to achieve its one and only mandate for price stability. The dovish-twist to the forward-guidance dragged on the Euro, with EUR/USD sliding below the 1.2400 handle to end the day at 1.2370.

--- Written by David Song, Currency Analyst and Shuyang Ren


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