Forex: EURUSD- Trading the European Central Bank (ECB) Rate Decision

Trading the News: European Central Bank Interest Rate Decision

What’s Expected:

Time of release: 01/10/2013 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 press conference with President Mario Draghi is spark a selloff in the the single currency as the Governing Council keeps the door open to lower the benchmark interest rate further. As the deepening recession in the euro-area threatens price stability, the central bank head may sound more dovish this time around, and Mr. Draghi may show a greater willingness to push borrowing costs to a fresh record-low in an effort to stem the downside risks for growth and inflation.

Recent Economic Developments

The Upside

Release	Expected	Actual
Euro-Zone Economic Confidence (DEC)	86.3	87.0
Euro-Zone Consumer Price Index Estimate (YoY) (DEC)	2.1%	2.2%
Euro-Zone Sentix Investor Confidence (JAN)	-14.2	-7.0

The Downside

Release	Expected	Actual
Euro-Zone Unemployment Rate (NOV)	11.8%	11.8%
Euro-Zone Retail Sales (MoM) (NOV)	0.3%	0.1%
Euro-Zone Construction Output s.a. (3M) (NOV)	--	-1.6%

The ongoing improvement in confidence along with the sticky inflation may encourage the ECB to strike a more neutral tone for monetary policy, and we may see the Governing Council talk down bets for another rate cut as the central bank sees the economy returning to growth later this year. However, record-high unemployment along with the persistent slack in the real economy may produce a very tepid recovery in the euro-area, and we may see President Draghi continue to embark on the easing cycle in an effort to preserve the 2% target for inflation.

Potential Price Targets For The Rate Decision

As the EURUSD threatens the bullish trend carried over from 2012, a slew of dovish rhetoric is likely to drag on the exchange rate, and we will look for a break and a close below the 1.3000 figure to see a more meaningful reversal in the pair. However, a more neutral statement from the ECB should help to preserve the upward trending channel in the EURUSD, and the single currency may continue to work its way towards the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as market participants scale back bets for another rate cut.

How To Trade This Event Risk

Trading the ECB rate decision may not be as clear cut as some of our previous trades as the central bank sticks to its current policy, but a less dovish policy statement may set the stage for a long Euro trade as market participants scale back bets for additional monetary support. Therefore, if President Draghi talks down bets for a rate cut, we will need to see a green, five-minute candle following the policy statements to generate a long 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 firs trade hits its mark in an effort to preserve our profits.

In contrast, the Governing Council may sound more cautious this time around as the region faces a deepening recession, and the central bank may continue to embark on its easing throughout the first-half of 2013 in an effort to encourage a stronger recovery. As a result, if the ECB shows a greater willingness to lower borrowing costs further, we will carry out the same setup for a short euro-dollar trade as the long position laid out above, just in the opposite direction.

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)
DEC 2012	12/06/2012 12:45 GMT	0.75%	0.75%	0	-89

November 2012 European Central Bank Interest Rate Decision

The European Central Bank (ECB) struck a rather dovish tone for monetary policy after keeping the benchmark interest rate at 0.75%, with President Mario Draghi showing a greater willingness to reduce borrowing costs further, and it seems as though the Governing council will continue to embark on its easing cycle in 2013 as the region faces a deepening recession. The initial bounce in the EURUSD was short-lived as the exchange rate slipped back below the 1.3050 figure, and the single currency tumbled lower throughout the North American trade as the pair ended the day at 1.2968.

--- Written by David Song, Currency Analyst

Forex News: EU Commissioner Rehn Sees Gradual Growth in 2013, Euro Higher

The final European session of the week is lacking of any major economic releases, but a stream of chatter from European officials caused the EURUSD to move sporadically across a tight thirty point range.

The first piece of good news came from Germany’s Handelsblatt newspaper, which reported that Germany only borrowed 22.8 billion Euros in 2012, over 5 billion Euros less than the 28.1 billion target. The drop in debt amount was due to lower interest payments on the bonds it sold. The story did not significantly affect Euro price action.

The Euro saw a modest 25 point jump against the US Dollar, as European Commissioner for Economic and Monetary Affairs Olli Rehn was speaking at the European Policy Centre. He said that the Euro-zone economy remains weak but he sees gradual growth. However, his tone was worried about losses in France’s and Finland’s export shares. Rehn also spoke about the United Kingdom, saying that the UK must remain an EU player.

In Germany, Economy Minister Rosler said he expects the German economy to revive in 2013, but he sees a decline in Q4 of 2013. Also following these comments, the Euro rose back to 1.3280. However, neither Rehn’s nor Rosler’s comments were necessarily responsible for the rise in Euro. Rather, it may have just been some volatility within the tight 30 point range.

The Swiss Franc declined as far as 1.2175 against the Euro for the first time in 4 months, following worse than expected Swiss deflation in December. Annual inflation was reported at -0.2%, lower than the expected -0.1% inflation. The British Pound saw a decline following disappointing industrial production numbers.

EURUSD may next see resistance by the current nine month high of 1.3308, and support could be provided by the broken resistance line of 1.3158.

Forex: Euro Rallies on Strong Spanish Bond Auction - ECB Ahead

ASIA/EUROPE FOREX NEWS WRAP

A continued weakening of the Japanese Yen and a strong Spanish bond auction have pushed up demand for high beta currencies and risk-correlated assets in the first half of the European trading day, as investors now wait to see what the European Central Bank has to say at their policy meeting, scheduled for 07:45 EST / 12:45 GMT, followed by ECB President Mario Draghi’s press conference at 08:30 EST / 13:30 GMT.

Unlike the Bank of England Rate Decision, just released a few moments ago which showed no change in their key rate (as it has been on hold at 0.50% since March 2009) or their Asset Purchase Target, the ECB Rate Decision today offers the opportunity to see how confident Euro-zone leaders are with respect to the progress of the crisis.

Although no major changes are expected, the results of the Spanish bond auction are, in my opinion, an indication of the success of the ECB’s “whatever it takes” to save the Euro plan, the OMTs, which were announced in September. Although the ECB has not yet had the need to implement such measures, the fact remains that the implicit backstop behind Spain has given the country significant time to get its finances together.

Accordingly, perhaps a hold in ECB policy today allows the Euro to run a little higher before retracing some of its gains today versus the US Dollar. Considering that, since the September meeting, the ECB has done little but downgrade the region’s growth prospects, subsequent meetings have produced negative outcomes: the EURUSD fell by -24-pips on the day of the November meeting; and the EURUSD fell by -98-pips on the day of the December meeting. With market sentiment today roundly positive, a more optimistic President Draghi could help lift the EURUSD initially.

Taking a look at European credit, the strong Spanish auction has boosted peripheral bonds and proved very supportive for the Euro. The Italian 2-year note yield has decreased to 1.320% (-19.4-bps) while the Spanish 2-year note yield has decreased to 2.012% (-29.0-bps). Similarly, the Italian 10-year note yield has decreased to 4.149% (-11.3-bps) while the Spanish 10-year note yield has decreased to 4.930% (-17.0-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 11:55 GMT

AUD: +0.61%

NZD: +0.49%

CHF: +0.31%

EUR:+0.31%

CAD:+0.23%

GBP:+0.22%

JPY:-0.32%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.32% (-0.11% past 5-days)

new aud usd is on fire