European Central Bank Interest Rate Decisions – Tips and Tricks to Trade the Euro

Hello there, this is and this video deals with the ECB or the European Central Bank, the ECB press conference, interest rate decision, and what matters for the Euro.

European Central Bank (ECB)

The ECB is one of the most important central banks in today’s financial markets and it has a tough job because it sets one monetary policy over the entire Euro area. The countries that share the common currency have a different economic performance. For instance, the Spanish economic performance differs from the German economic performance or conditions in Greece differ from the ones in France, etc. But the ECB must set the monetary policy in such a way that it fits all these countries’ economies, and that is the most difficult task for a central bank.

The ECB meets every six weeks, on a Thursday, to set the interest rates on the Euro. It establishes three interest rates, with the deposit facility rate being the most important one, currently below the zero level for many years.

Every six weeks, the Governing Council looks at what happened with the economy and on a Thursday releases the interest rate decision. Forty-five minutes later, the press conference starts. Between the two, the interest rate decision, which is highly anticipated, and the press conference, the most important one is the press conference.

During the press conference, press representatives ask questions and the Euro travels all over the place. The press conference starts with a statement, when the ECB President reads the statement and then it answers questions regarding the ECB actions, what the ECB delivered, if there was unanimity, inflation, etc. That is the most volatile period for the Euro pairs, and in particular the EURUSD.

How ECB Manage the Inflation

The ECB has a single mandate that focuses on price stability, or inflation below but close to two percent. If inflation comes to 2% and breaks to the upside, the ECB will intervene, it will change the tone to hawkish and the Euro will appreciate because the expectations grow that the ECB will hike the interest rates or at least tighten the monetary policy.

On the other hand, if inflation moves towards the zero level, the ECB will be forced to intervene too. This is what happened this week, as inflation in the Euro area came at 0.4% and the ECB looks at the core inflation. This data shows the change in prices without considering energy prices like transportation, and so on. That core inflation dropped to 0.4% from one point something and it threatens to break below the zero level and the ECB cannot stand seeing its mandate being threatened.

So, the expectations grew that the ECB will change the tone at the next week’s press conference. But the inflation was released right here. After the release, the EURUSD made a new high, a marginal one, and then sold aggressively, as investors prepared for the ECB decision next week.

You might say that this was the NFP week and everything relates to the NFP this week. Yes and no. Trading is a forward-looking process and what matters now is what the ECB will do next week. Based on what inflation showed, the ECB should change the tone to dovish if not delivering more easing.

Additional Tips

During the press conference focus on the statement and the upcoming questions. Inflation is what matters the most for the ECB. This is what you should look when trading the Euro.

Also, watch for verbal interventions. This week, for instance, when the EURUSD reached the 1.20 level, the ECB Chief Economist Philip Lane came out and say that the ECB does not target a specific exchange rate, but the EURUSD rate matters. From that moment on, at 1.20, the market trades at 1.1790, mostly the result of verbal intervention.

Look also for the PMIs, released throughout the trading month, and they are surveys that show contractionary and expansionary sectors. If a sector expands, the PMI comes above the 50 level, if it contracts, it comes below the 50 level.

The monthly evolution of the PMI gives you an idea about what the market might do.

During the ECB day, the market already priced in what it is to be expected and then 45 minutes before the press conference, there is the interest rate decision. If the ECB considers that the interest rate decision is not enough, the ECB will deliver some more – some tweets, some short news, trying to prepare the market for what’s about to come. Then, on the actual statement, the Euro often moves before the President reading the statement.

Sum Up

To sum up, the ECB is one of the most important central banks in the current financial system; the rate that matters the most for the FX market is the EURUSD; the ECB meets every six weeks; it sets three rates, not only one – the margin deposit facility rate, the deposit facility rate and the refinancing rate; the deposit facility rate is the most relevant one, this one is in the negative territory for many years now; changes in the ECB language may influence the value of the Euro.

Thank you for being here – bye,bye.