The European Central Bank is widely expected to hold the benchmark interest rate steady at the record-low of 1.00%, and is anticipated to announce the outlines of the EUR 60B covered bond purchase in full detail as the Governing Council attempts to put a floor on the key rate.
[U][B]Trading the News: European Central Bank Rate Decision[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: [B] 06/04/2009 11:45 GMT, 07:45 EST[/B]
Primary Pair Impact : [B]EURUSD[/B]
Expected: 1.00%
Previous: 1.50%
[U][B]Impact the European Central Bank Rate Decision has had on EURUSD over the last 2 months[/B][/U]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
May 2009
05/07/2009 11:45 GMT
1.00%
[B]1.00%[/B]
+14
+39
Apr 2009
04/02/2009 11:45 GMT
1.00%
[B]1.25%[/B]
+116
+115
[U]
May 2009 European Central Bank Rate Decision
[/U]
Policymakers in the Euro-Zone lowered the key interest rate to a fresh record low of 1.00% in May, and said that the European Central Bank could purchase EUR 60B in covered bonds in an effort to steer the economy out of its worst economic downturn in over half a century. The International Monetary Fund lowered its growth forecast for the region, and forecasts economic activity to contract 4.2% this year and 0.4% in 2010, and went onto say that ‘further actions by policymakers, particularly in the financial sector, are needed to restore market trust, and accelerate the recovery.’ As the outlook for growth and inflation falter, ECB President Trichet said maintaining price stability will be ‘crucial element in confidence,’ and reinforced an improved outlook for future growth as he anticipates a recovery next year.
[U]April 2009 European Central Bank Rate Decision[/U]
The European Central Bank lowered the benchmark interest rate 25bp to a record-low of 1.25% amid expectations for a 50bp cut, and the central bank is likely to ease policy further over the near-term as the region faces a deepening economic downturn. At the same time, President Trichet stated that the current policy put in place ‘is not the lowest limit’ for the key rate and went onto say that the board would discuss utilizing unconventional tools to stimulate the economy as policymakers attempt to put a floor on the interest rate. Nevertheless, Vice President Lucas Papademos said that the central bank could stimulate the economy by purchasing corporate debt, while Bundesbank President Axel Weber voiced his opposition to such a move, and the split amongst the Governing Council could instill a weakening outlook for future policy.
[B]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:
[U][B]Bullish Scenario:[/B][/U]
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. [U][B]Bearish Scenario:[/B][/U]
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.
[B]How To Trade This Event Risk [/B]
The European Central Bank is widely expected to hold the benchmark interest rate steady at the record-low of 1.00%, and is anticipated to announce the outlines of the EUR 60B covered bond purchase in full detail as the Governing Council attempts to put a floor on the key rate. At the same time, council member Ewald Nowotny said that he anticipates the central bank’s growth forecast to fall lower in this month, and market participants speculate that the board may decide to expand the money supply beyond the initially estimated amount as price pressures falters. The April CPI estimate for the Euro-Zone plunged to its the lowest level on record, while producer prices slipped at an annual rate of 4.6% during the same period to mark the biggest drop since 1981, and the data reinforces a weakening outlook for inflation as economic activity deteriorates. The preliminary GDP reading showed the annual rate of growth plunged 4.8% in the first quarter, driven by an even deeper contraction in private consumption, while a separate report showed the unemployment rate surged to a 10-year high of 9.2% in April, and conditions are likely to get worse as businesses continue to scale back on production and employment in order to weather the downturn in global trade. In addition, ECB Vice-President Lucas Papademos, along with board member Ewald Nowotny said economic activity is likely to remain very weak this year, and expect growth to stay low in 2010, while Mr. Weber anticipates an recovery next year, and the comments suggests that the central bank may continue to ease policy further throughout the year as the central bank maintains a 2% target for price growth over the medium-term. Nevertheless, as the Governing Council fails to meet on common ground, policymakers may fail to take decisive action, which could prolong the downturn in the economy, and fears of a deepening recession is likely to weigh on the exchange rate over the near-term as the outlook for growth and inflation deteriorate. However, as risk trends continue to dictate price action in the currency market, a rise in market sentiment could lead the euro higher as participants raise their appetite for higher-yielding investments.
Trading the given event could favor a bullish outlook for the single-currency as the ECB is widely expected to establish a floor on the interest rate, and price action following the release could set the stage for a rally in the euro as risk appetite takes hold of investors. Therefore, if the central bank holds rates steady and maintains its previous growth forecast, we will look for a green, five-minute candle following the release to confirm a buy entry on two-lots of EUR/USD. If market conditions pave the way for a long euro trade, we will place our initial stop at the nearby swing low (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based purely on discretion, and in an effort to preserve our profits, we will move the stop on the second lot once the first trade reaches its target.
On the other hand, expectations for lower inflation paired with fears of a deepening recession could lead the ECB to take additional steps to shore up the economy, and dovish commentary following the rate decision could instill a bearish outlook for the single-currency as growth prospects falter. As a result, if the central bank leaves the door open for another rate cut or decides to increase the money supply beyond the initial estimate, we will look to sell the euro, and will follow the same strategy for a short EUR/USD trade as the long position mentioned above.
