Trading the News: European Central Bank Interest Rate Decision

What’s Expected:
Time of release: 04/04/2013 11:45 GMT, 7:45 EDT
Primary Pair Impact: EURUSD
Expected: 0.75%
Previous: 0.75%
DailyFX Forecast: 0.75%

Why Is This Event Important:

Although the European Central Bank (ECB) is widely expected to keep the benchmark interest rate at 0.75% in April, the Governing Council may adopt a more dovish tone for monetary policy as the region faces a prolonged recession. As the persistent weakness in the euro-area threatens price stability, ECB President Mario Draghi may show a greater willingness to implement another rate cut in the coming months, and the central bank may have little choice but to carry out its easing cycle throughout 2013 as the region struggles to return to growth.

Recent Economic Developments

The Upside

Release

Expected

Actual

Euro-Zone Consumer Price Index Estimate (YoY) (MAR)

1.6%

—

Euro-Zone Labour Costs (YoY) (4Q)

—

1.3%

Euro-Zone Retail Sales (MoM) (JAN)

0.3%

1.2%

The Downside

Release

Expected

Actual

Euro-Zone Unemployment Rate (FEB)

12.0%

12.0%

Euro-Zone Purchasing Manager Index Composite (MAR A)

48.2

46.5

Euro-Zone Gross Domestic Product s.a. (QoQ) (4Q A)

-0.4%

-0.6%

The sharp rebound in retail sales paired with the stickiness in inflation may prompt the ECB to endorse a more neutral outlook for monetary policy, and the central bank may remain on the sidelines as it still expects the euro-area economy to come out of the recession later this year. However, record-high unemployment along with the ongoing contraction in manufacturing and service-based activity may further dampen the outlook for price stability, and a growing number of central bank officials may push for a rate cut in an effort to steer the region out of recession.

Potential Price Targets For The Rate Decision

As the EURUSD struggles to push back above the 200-Day SMA (1.2880), the pair may preserve the range-bound price action going into the ECB interest rate decision, but the downward trending channel dating back to February may continue to take shape should the central bank sound more dovish this time around. As the euro-area remains mired in recession, the Governing Council may show a greater willingness to further embark on its easing cycle, and we may see the EURUSD continue to give back the rebound from November (1.2659) as the central bank preserves its one and only mandate to ensure price stability.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as the ECB sticks to its current policy, but the fresh batch of central bank rhetoric may set the stage for a long Euro trade should the Governing Council remain upbeat on the economy. Therefore, if President Draghi strikes a more neutral tone for monetary policy and talks down bets for a rate cut, we will need a green, five-minute candle following the statement to generate a buy entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade hits its mark in an effort to secure our profits.

In contrast, the Governing Council may adopt a more cautious tone for the region as the region remains at risk of a prolonged recession, and we may see a growing number of ECB officials show a greater willingness to ease policy further in order to stem the downside risks for growth and inflation. As a result, if Mr. Draghi shows a greater willingness to push the benchmark interest rate to a fresh record-low, we will carry out the same strategy for a short euro-dollar trade as the long position mentioned above, just in the opposite direction.

Impact that the European Central Bank Interest Rate Decision has had on EUR during the last meeting

Period

Data Released

Estimate

Actual

Pips Change
(1 Hour post event )

Pips Change
(End of Day post event)

MAR 2013

03/07/2013 12:45 GMT

0.75%

0.75%

+29

+83

March 2013 European Central Bank Interest Rate Decision

The European Central Bank (ECB) kept the benchmark interest rate at 0.75% in March even as the Governing Council cut its growth forecast for the euro-area, while central bank President Mario Draghi held a rather upbeat tone for the region as he expects the economy to return to growth later this year. Although the initial reaction to the rate announcement was fairly muted, the fresh batch of central bank rhetoric propped up the EURUSD, with the pair ended the day at 1.3107.

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

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Source: Daily fx