The European Central Bank is widely expected to hold the benchmark interest rate at 1.00% in September as central bank President Jean-Claude Trichet anticipates economic activity to improve going into the following year, and long-term expectations for higher borrowing costs may continue to support the rally in the euro as market participants speculate the Governing Council to tighten policy over the next 12 months.
[B][U]Trading the News: European Central Bank Interest Rate Decision[/U][/B]
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[B][U]What’s Expected[/U][/B]
Time of release: [B]09/03/2009 11:45 GMT, 07:45 EST[/B]
Primary Pair Impact[B] : EURUSD[/B]
Expected: 1.00%
Previous: 1.00%
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[B][U]Impact the European Central Bank Rate Decision has had on EURUSD over the last 2 meetings[/U][/B]
[U]June 2009 European Central Bank Rate Decision[/U]
The European Central Bank kept the benchmark interest rate at 1.00% in August and maintained its EUR 60B in covered bond purchases in an effort to support the financial system, and the improved outlook held by President Trichet may continue to drive the exchange rate higher as the central bank head anticipates the economy to recovery sooner than initial expected. At the same time, Mr. Trichet noted economic activity is likely to remain weak this year as the ECB forecasts the growth rate to contract at an annual rate of 4.6% from 2008, and the Governing Council may continue to hold a neutral policy stance going into 2010 as the board anticipates an economic recovery next year. As the central bank adopts a wait-and-see approach, investors anticipate the ECB to tighten policy over the next 12 months as the economic outlook improves, and long-term expectations for higher interest rates may drive the euro higher over the near-term.
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May 2009 European Central Bank Rate Decision[/U]
ECB President Trichet stated monetary policy remains ‘appropriate’ after holding borrowing costs at the record- low for the third consecutive month, and the central bank may adopt a neutral policy stance going forward as inflation expectations remain well-anchored. However, the central bank head maintained a dovish tone and reiterated that 1.00% is not ‘the lowest’ limit for the interest rate, and expects economic activity ‘to remain weak’ throughout the year as households and businesses face tightening credit conditions. Meanwhile, the central bank went onto say that the ‘risks to the economic outlook are balanced,’ and sees scope for a recovery ‘around mid-2010’ as the government takes unprecedented steps to steer the region out of the worst recession since World War II. As policy makers hold an improved outlook for future growth, the rise in the interest rate outlook may drive the euro higher as investors speculate the ECB to tighten policy over the next 12 months.
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What To Look For Before The Release[/B]
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
[B][U]Bullish Scenario:[/U][/B]
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If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.
[B][U]Bearish Scenario:[/U][/B]
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.
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How To Trade This Event Risk[/B]
The European Central Bank is widely expected to hold the benchmark interest rate at 1.00% in September as central bank President Jean-Claude Trichet anticipates economic activity to improve going into the following year, and long-term expectations for higher borrowing costs may continue to support the rally in the euro as market participants speculate the Governing Council to tighten policy over the next 12 months. A Bloomberg News survey shows all of the 58 economists polled forecast the ECB to hold the key rate at the record-low as the central bank commits EUR 60B in covered bond purchases to foster a sustainable recovery, while Credit Suisse overnight index swaps are up more than 50bp in September, and market participants may continue to ramp up expectations for a rate hike in the coming months as policy makers raise their outlook for growth and inflation. The preliminary 2Q GDP reading showed economic activity contracted 0.1% from the first three months of the year, with household consumption increasing 0.2% amid expectations for a flat reading, while business investments fell less than expected during the three-months through June and conditions are likely to improve in the coming months as the government takes unprecedented steps to steer the region out of recession. However, a report by the European Union statistics office showed the jobless rate jumped to 10-year high of 9.5% in July, while retail spending unexpectedly weakened during the same period, and the central bank may hold a cautious tone subsequent to the rate decision as ECB President Trichet sees a risk of a slower recovery following the slump in employment. Moreover, the headline reading for inflation fell at a record pace during July, while producer prices plunged 8.5% from the previous year to mark the largest decline since the series began in 1981, and the slump in growth and inflation may lead the central bank to hold a dovish policy stance going forward as the prospects for a sustainable recovery remains highly uncertain. Nevertheless, as the Governing Council is expected to adjust the economic forecast this month, an upward revision for GDP is likely to spur demands for the single-currency however, as ECB President Trichet maintains a dovish outlook for price growth, a downturn in the interest rate outlook could weigh on the exchange rate as investors scale back expectations for higher borrowing costs.
Trading the given event risk may not be as clear cut as some of our previous trades but nevertheless, as the ECB is anticipated to hold an improved outlook for growth and inflation, price action following the rate decision could set the stage for a long euro-dollar trade. Therefore, if the central bank holds the benchmark interest rate at the record low, maintains its EUR 60B in covered bond purchases, and raises its economic forecast, we will look for a green, five-minute candle following the decision to confirm a buy entry on two-lots of EUR/USD. Once these conditions are met, we will place our initial stop at the nearby swing low or a reasonable distance taking volatility into account, and this risk will establish our first objective. Our second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target.
In contrast, the downturn in price growth paired with fears of a slower recovery may lead the Governing Council to hold a dovish policy stance going forward, and an unexpected downward revision in the growth forecast is likely to drag on the exchange rate as investors weigh the outlook for future policy. As a result, if the ECB remains willing to ease policy further and expects GDP to contract at an annual rate of 4.6% this year, we will favor a bearish forecast for the single-currency, and will follow the same strategy for a short euro-dollar trade as the long position mentioned above, just in reverse.
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