TheNews

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

Even though the European Central Bank (ECB) is widely expected to retain its current policy in September, the fresh updates coming out of the Governing Council may trigger a selloff in EUR/USD should the committee show a greater willingness to expand/extend its quantitative easing (QE) program.

What’s Expected:



Why Is This Event Important

Dovish rhetoric accompanied by a downward revision in the ECB’s growth & inflation forecast is likely to dampen the appeal of the Euro, and central bank President Mario Draghi may talk up bets for additional monetary support in an effort to further insulate the fragile recovery in Europe.

Expectations: Bearish Argument/Scenario

Release	Expected	Actual
Trade Balance s.a. (JUN)	23.1B	21.9B
Gross Domestic Product s.a. (YoY) (2Q A)	1.3%	1.2%
Retail Sales (MoM) (JUN)	-0.2%	-0.6%

The ECB may take additional steps to shore up the ailing economy as it struggles to achieve its one and only mandate for price stability, and bets for more easing may lead EUR/USD to give back the rebound from the previous month amid the growing deviation in the policy outlook.

Risk: Bullish Argument/Scenario

Release	Expected	Actual
Unemployment Rate (JUL)	11.1%	10.9%
Consumer Price Index Core (YoY) (AUG A)	0.9%	1.0%
Economic Confidence (AUG)	103.8	104.2

Nevertheless, we may get more of the same from the ECB as the non-standard measures work through the real economy, and the near-term bound in EUR/USD may gather pace in September should the central bank endorse a wait-and-see approach.

How To Trade This Event Risk
Bearish EUR Trade: ECB Shows Greater Willingness for Larger/Longer QE Program

• Need red, five-minute candle following the policy announcement 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: President Draghi Continues to Endorse Wait-and-See Approach

• 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

• Despite expectations for a greater deviation in the policy outlook, need a break of the near-term bullish trends in price & RSI to favor a further decline in EUR/USD.
• Interim Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
• Interim Support: Interim Support: 1.0790 (50% expansion) to 1.0800 (23.6% 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)
JUL 2015	07/16/2015 11:45 & 12:30 GMT	0.05%	0.05%	+5	-1

The European Central Bank (ECB) stuck to its current policy in July, with the Governing Council keeping the benchmark interest rate at the record-low of 0.05%, while preserving its pledge to ‘fully implement’ the quantitative easing program. Despite the ongoing concerns surrounding the Greek crisis, the ECB may keep its asset-purchase program capped at EUR 60B/month as the central bank sees a ‘moderate’ recovery in Europe. The bullish market reaction to the ECB rate decision was short-lived, with EUR/USD falling back from a session high of 1.0925 and closing the day at 1.0869.

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


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