Trading the News: European Central Bank Interest Rate Decision
What’s Expected:
Time of release: 03/07/2013 12:45 GMT, 7:45 EST
Primary Pair Impact: EURUSD
Expected: 0.75%
Previous: 0.75%
DailyFX Forecast: 0.75%
Why Is This Event Important:
Beyond the European Central Bank (ECB) interest rate decision, the policy statement accompanying the rate decision may spark another sharp selloff in the EURUSD should President Mario Draghi show a greater willingness to push the benchmark interest rate to a fresh record-low. As the debt crisis continues to drag on the real economy, the deepening recession may prompt the Governing Council to further discuss negative interest rates for the euro-area, and we may see the ECB embark on its easing cycle throughout 2013 as the outlook for growth and inflation deteriorates.
Recent Economic Developments
The Upside
Release
Expected
Actual
Euro-Zone Retail Sales (MoM) (JAN)
0.3%
1.2%
Euro-Zone Economic Confidence (FEB)
89.9
91.1
Euro-Zone Trade Balance s.a. (DEC)
11.5B
12.0B
The Downside
Release
Expected
Actual
Euro-Zone Unemployment Rate (JAN)
11.8%
11.9%
Euro-Zone Consumer Price Index Estimate (YoY) (FEB)
1.9%
1.8%
Euro-Zone Gross Domestic Product s.a. (QoQ) (4Q A)
-0.4%
-0.6%
The rebound in retail sales paired with the ongoing improvement in euro-area confidence may encourage the ECB to strike a more neutral tone for monetary policy, and the central bank may stick to the sidelines throughout the first-half of the year as the inflation outlook remain ‘broadly balanced.’ However, the central bank may push back its forecast of seeing the region return to growth amid record-high unemployment along with the ongoing slack in the real economy, and the fresh batch of comments from President Mario Draghi may dampen the appeal of the single currency should the central bank head see scope for a rate cut in the coming months.
Potential Price Targets For The Rate Decision
As the relative strength on the EURUSD continues to flirt with oversold territory, the pair looks poised for a near-term correction, but a dovish statement from the ECB may spark a move back towards the 200-Day SMA (1.2841) as market participants look for fresh record-low interest rates in the euro-area. As the pair fails to maintain the upward trend carried over from the previous year, we are looking for a move back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, and the bearish sentiment surrounding the single currency may gather pace over the near to medium-term as the euro-area struggles to emerge from the recession.
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 is widely expected to maintain its current policy in March, but fresh batch of central bank rhetoric may pave the way for a long Euro trade should the Governing Council strike a more upbeat tone for the region. Therefore, if President Draghi adopts a more neutral tone for monetary policy and sees limited scope 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 fulfilled, 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.
On the other hand, the Governing Council may adopt a more cautious tone for the region as the prolonged recession threatens price stability, 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 strikes a highly dovish tone for monetary policy, we will carry out the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.
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)
FEB 2013
02/07/2013 12:45 GMT
0.75%
0.75%
-75
-168
February 2013 European Central Bank Interest Rate Decision
The European Central Bank (ECB) struck a dovish tone for monetary policy as President Mario Draghi warned that the persistent strength in the single currency may threaten price stability, and continued to highlight the ongoing slack in the real economy as the region faces a deepening recession. Indeed, the Euro sold-off following the policy statement, with the EURUSD slipping below the 1.3400, and the single currency continued to lose ground during the North American trade as the pair ended the day at 1.3396.
— Written by David Song, Currency Analyst
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Source: Daily fx