[B]Trading the News: ECB Rate Decision / News Conference[/B]
[B][U]What is Expected[/U]
[/B]Time of release: [B]11/08/2007 12:45 GMT, 07:45 EST (Conference 13:30 GMT, 08:30 EST)[/B]
Primary Pair Impact : [B]EURUSD[/B]
Expected: [B]4.00%
[/B]Previous: 4.00%
[B]How To Trade This Event Risk[/B]
The European Central Bank has sat on a 4.00 percent overnight lending rate for the past four consecutive policy meetings. And, given the official and unofficial consensus among economists and in the markets, a pass will most likely be the outcome for the November 8th meeting as well. However, the rate decision itself will not be the only opportunity for an event-driven trade. The central bank’s statement and news conference, in which the President Jean Claude Trichet will offer up the monetary policy group’s outlook on growth and inflation as well as field questions from reporters, could trigger a strong move from the high flying euro. In fact, looking over the past three announcements, there was little to no increase in volatility following the decision; yet opportunities for fundamental trades have consistently presented themselves following the release of the statement. For this coming statement release (scheduled for 13:30 GMT), there will be a few immediate notables to grasp a fundamental direction. First and foremost, the presence or absence of ‘strong vigilance’ will set the tone. This closely monitored idiom was absent last month. More likely, the market will be looking for the adjective of ‘accommodative’ in describing monetary policy. This was a staple for hawks and was dropped for the first time in nearly a year last month. From there, any adjustment to forecasts of cooling growth or inflation to hover near 2.0 percent or mention of further credit market problems in the near future will slowly impact the currency. The ECB’s policy stance will inevitably draw be measured against the Fed’s cuts and RBA’s hike.
In the past few months, the European monetary authority has grown increasingly dovish – turning from consistent hikes, to breaking the ‘strong vigilance’ chain, to easing inflation and growth forecasts. As such, any notable change to this slow degeneration could recharge rate speculators. Optimally, a surprise hike would be the order for a euro rally; but that outlier aside, the return of ‘strong vigilance’ or ‘accommodative’ could bring back the hope of further hikes. Beyond that, discretion will apply. To consider a long EURUSD, event-driven trade on this risk we will look for a clear fundamental engine and a green, five –minute candle to confirm entry. We will take two lots at market with a stop at the nearby swing low (or reasonable, fixed-distance) and automatically set the first limit equal to risk on a single lot. The target on the second lot will be based on discretion and should taken into account the level of fundamental surprise. When the first lot takes profit, we will move the second lot’s profit to breakeven to conserve profit.
Considering the evolution of policy over the past four months and the heights of EURUSD, risk clearly lies to the downside. Any unmistakable warning of an eventual rate cut turn the pair lower and may even mark a medium-term top.
