Trading Strategy: EU ECB Interest Rate Decision, Impact On Euro Dollar

ECB (European Central Bank) will be rendering its rate decision today, and it will have a pivotal short term impact on the Euro dollar. However, it is widely believed that ECB will keep rates unchanged at 0.75%. ECB Interest Rate decision will be followed with a press conference and that will be the main focus for the day as Draghi take this opportunity to announce ECB’s view on the economy and future policy direction. Here´s the forecast:

7:45am (NY Time) EU ECB Interest Rate Decision Forecast 0.75% Previous 0.75%
Deviation: 0.25% (SELL EUR 0.50%)

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 Draghi issues the official statement on this rate decision. Since it is extremely unlikely to get a surprise from ECB (we stand corrected as Draghi has surprised the market twice during his first three rate meetings), there is usually no volatility following this release.

However, in the unlikely event that ECB surprises the market by cutting rates 25 basis points or more, then expect market to go into a selling frenzy 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 keep rates unchanged to as expected at 0.75%, then we should see relatively no change in the market as this lack of move is expected… Please follow the recommendations above ONLY if ECB surprises the market.

I’d recommend to use the Recommended Pairs from above as they are based on my CSM, which should provide the best combination of currency pairs to trade based on better/worse news…of course, you can also trade the default pair: EUR/USD.

Outlook Score
Outlook score is derived from market sentiment, focus, and economic indicators for the currency. It represents the long-term trend of the currency and its market perception. In short, a strong Outlook Score means more long-term demand for the currency, and a weak Outlook Score is the opposite.

Definition:
ECB Interest Rate is commonly known as the rate at which the European Central Bank (ECB) charges banks in EU member states to borrow money. The minimum bid rate is an important tool in the ECB’s monetary policy and changes in this rate affect other interest rates in the EU banking system. The Minimum Bid Rate is also the The lower limit to the interest rates at which counterparties may submit bids in variable rate tenders.; The Main Refinancing (Refi Rate) is the rate on the main refinancing operations, often referred to as the refi rate. The level is determined by the ECB Governing Council. The Deposit Rate is the Interest rate at which credit institutions may at all times place overnight deposits with the national central bank. The deposit rate is normally 100 basis points below the minimum bid rate, thereby setting a lower limit on short-term money market rates.