Wednesday, August 3, 2011

European Central Bank (ECB) Interest Rate Decision - 4 August 2011


ECB (European Central Bank) will be rendering its rate decision today, and it will have a pivotal short term impact in the Euro dollar. However, it is widely believed that ECB will keep rate unchanged at 1.25%… Here´s the forecast:

7:45am (NY Time) EU ECB Rate Decision 

Forecast 1.50% Previous 1.50%

ACTION: EUR/USD BUY 1.50%

The Trade Plan

ECB rate decision comes in two part, the first one is the 7:45am rate announcement followed by the 8:30am Press Conference where ECB chief Trichet issues the official statement on this rate decision. Since it is extremely unlikely to get a surprise from ECB, there is usually no volatility following this release, and our time is better served to focus on Trichet´s speech in 45 minutes.

However, in the unlikely event that ECB surprises the market by hiking rates 25 basis points or more, then expect market to go into shock and we should jump in immediately on a spike trade because no matter what the slippage or spread is, we will end up making positive pips.

Of course, if ECB decides to leave rates unchanged at 1.50% as expected, then we should stay out of the market.

The Market

As usual, the real event for ECB rate meeting is the Press Conference at 8:30am. ECB has been pausing during the last few meetings and it is very unlikely for a surprise rate hike to take place... If the bank is looking to increase rates at the September meeting, then they will certainly signal this in advance during today´s press conference. However, since the press conference is beyond the scope of news trading and into advanced market interpretation, I´m going to advice everyone to stay out of the market until Trichet finishes his press conference (usually within 1~2 hours).

Additional Thoughts

It is important to understand that ECB press conference is delivered in 2 parts: The first part is the prepared statement by Trichet and copy of the statement will be available on ECB´s official website. Then it will be followed by a Q&A session, where onside media members will have a chance to ask questions, market reaction is usually unpredictable, therefore it is best to stay out of the market during the entire press conference.

Also it is important to note that most analysts agree that ECB may hike rates once more before the end of 2011, and it is most likely during the November meeting. If we see hawkish comments from Trichet in today’s meeting over the monetary policy and uses words like “strong vigilance”, then we’ll probably see a rate hike on September 8th meeting.

Pre-News Consideration

There should be no pre-news consideration for this particular release, as the real event will be Trichet Press Conference at 8:30am.

by Henry Liu