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ECB Policy Adjustment to Fuel EUR/USD Losses- Summer Lows on Tap?

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- European Central Bank (ECB) to Retain Zero-Interest Rate Policy (ZIRP), QE Program.

- Will the Governing Council Adjust/Extend the Non-Standard Measures?

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Trading the News: European Central Bank (ECB) Interest Rate Decision

Even though the European Central Bank (ECB) is widely anticipated to retain its current policy in October, the EUR/USD may face a sharp move should President Mario Draghi & Co. take additional steps to further support the monetary union.

What's Expected:

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Why Is This Event Important:

After cutting the growth forecast in September, the Governing Council may push out the deadline for its quantitative easing (QE) program and adjust the guidelines of its non-standard measures in an effort to encourage a stronger recovery. However, more of the same from the ECB may trigger a bullish reaction in the single-currency should the central bank stick to the March 2017 deadline for its asset-purchases.

Expectations: Bearish Argument/Scenario

Release Expected Actual
Consumer Price Index Core (YoY) (SEP A) 0.9% 0.8%
Retail Sales (YoY) (AUG) 1.5% 0.6%
Unemployment Rate (AUG) 10.0% 10.1%

Subdued price growth accompanied by signs of a slowing recovery may push the ECB to broaden the scope of its non-standard programs, and a surprise move by the central bank may drag on the single-currency as the central bank continues to push monetary policy into unchartered territory.

Risk: B ullish Argument/Scenario

Release Expected Actual
Trade Balance s.a. (AUG) 20.4B 23.3B
Industrial Production s.a. (AUG) 1.5% 1.6%
Business Climate Indicator (SEP) 0.05 0.45

Nevertheless, improved confidence paired with the pickup in the terms of trade may force the Governing Council to retain the current policy, and the Euro may stage a larger recovery should the central bank talk down expectations for an imminent move.

How To Trade This Event Risk ( Video )

Bearish EUR Trade: Governing Council Extends/Adjusts QE Program

  • Need red, five-minute candle following the policy statement to consider a short EUR/USD trade.
  • If market reaction favors a bearish Euro trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from cost; need at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is met, set reasonable limit.

B ullish EUR Trade: ECB Preserves Current Policy, Endorses Wait-and-See Approach

  • Need green, five-minute candle to favor a long EUR/USD trade.
  • Implement same strategy as the bearish euro trade, just in the opposite direction.

Potential Price Targets For The Release

EUR / USD Daily

Chart - Cre ated Using Trading View

  • Failure to preserve the upward trend from December raises the risk for a further decline in EUR/USD, but the lack of momentum to test the July low (1.0952) may foster a near-term rebound in the exchange rate especially as the Relative Strength Index (RSI) struggles to break below 30 and push into oversold territory.
  • Interim Resistance: 1.1420 (23.6% retracement) to 1.1428 (June high)
  • Interim Support: 1.0912 (June low) to 1. 0940 (61.8% retracement)

Impact that the ECB rate decision has had on EUR/USD during the last meeting

Period Data Released Estimate Actual Pips Change(1 Hour post event ) Pips Change(End of Day post event)
SEP2016 09/08/2016 11:45 & 12:30 GMT 0.00% 0.00% +29 -31

September 2016 European Central Bank Interest Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

The European Central Bank (ECB) stuck to the sidelines in September, with President Mario Draghi largely endorsing a wait-and-see approach for monetary policy as the Governing Council continues to monitor the impact of the zero-interest rate policy (ZIRP). Nevertheless, the ECB kept the door open to further embark on its easing cycle as the central bank curbed its growth forecast for the policy horizon, and the Governing Council may continue to push monetary policy into unchartered territory as they struggle to achieve their one and only mandate for price stability. The initial move in the Euro was short-lived, with EUR/USD struggling to hold above the 1.1300 handle as the pair closed the day at 1.1255.

Get our top trading opportunities of 2016 HERE

Read More:

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DAX Battle Lines Drawn as Index Looks to Regain 2016 Losses

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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