The European Central Bank is anticipated to hold the benchmark interest rate steady at 4.25% as President Trichet remains focused on the banks one and only mandate to ensure price stability throughout the Euro-Zone.
[B]How To Trade This Event Risk[/B]
The European Central Bank is anticipated to hold the benchmark interest rate steady at 4.25% as President Trichet remains focused on the banks one and only mandate to ensure price stability throughout the Euro-Zone. Indeed, the rise in the cost of living throughout Europe has encouraged upside wage pressures to build, which could lead the central bank to hold borrowing costs at a seven year high despite mounting growth concerns. Economic activity has clearly deteriorated as the economy contracted 0.2% during the second quarter, and conditions may only get worse as Germany, Europe’s largest economy, is on the brink of a recession. Furthermore, the unemployment rate increased to 7.5% from a revised reading of 7.4%, which suggests that firms may continue to cutback on employment as domestic and foreign demands waver. Additionally, the US financial crisis has certainly taken a toll on the European economies as Fortis, Dexia, and Hypo Real Estate were bailed out this week, and an increased number of European banks may find themselves in troubled waters as the financial turmoil continues to spread throughout the global economy. Overnight index swaps are showing that market participants have already raised bets that the ECB will cut at least 75bp over the next 12 months, which would only fuel bearish sentiment for the euro going forward. Yesterday, we saw the euro slipped to its lowest level against the US dollar since its introduction in 1999, which suggests that the hawkish rhetoric held by the central bank may not be enough to bolster the currency.
However, if President Trichet maintains his focus on price stability and reinforces his hawkish outlook by explicitly stating that the central will not lower rates any time this year; the comments could foster bullish sentiment for the euro, and we will look for a green, five minute candle to confirm a long entry on two lots of EURUSD. We will setup our initial stop at the nearby swing low (or reasonable distance) and our first target will equal this risk. Our second target will be based on discretion, and we will move the second stop to break even when the first target is hit in order to preserve our profits.
Alternatively, mounting growth risks for the Euro-Zone and Germany may force the ECB to push inflationary concerns to the backburner, and may shift their focus to the downside risks of growth. Therefore, any dovish commentary following the rate decision will favor a short trade for the EURUSD. We will follow the same strategy for the short as the long position mention above, just in reverse.
