The Dos and Don’ts of Trading the ECB Rate Decision

Do tune in at 11:45 am GMT for the European Central Bank (ECB) rate decision and 12:30 pm GMT for the press conference.

First things first, know what time ECB President Mario Draghi will take the spotlight on Thursday, August 2, 2012!

You will need to keep an ear out for what the head honcho has to say. You can do this by: turning on your TV and tuning in to CNBC, Bloomberg, or your favorite financial news channel; following developments on Twitter; or looking for a live stream on the internet. (The ECB website actually broadcasts the press conference in real-time but with a slight delay.)

Don’t expect the ECB to slash rates.

The central bank knocked its refinancing rate down from 1.00% to 0.75% and its deposit rate down from 0.25% to 0.00% in its last meeting, so it might be too early for the ECB to slash rates again.

European central bankers will most probably wait for the effect of their most recent move to sink in first before cutting rates further. Market gurus predict that such a move won’t happen any time before September.

Do consider the possibility that the ECB will try something new.

Some of the market’s big dogs (Goldman Sachs, Deutsche Bank, Credit Agricole, and Commerzbank) think that the ECB will unveil something new tomorrow after Draghi’s surprisingly bold tone in his speech last week. What could it be?

One of the actions that analysts think the ECB will take is to revive its Securities Markets Program which was first introduced in 2010. Under it, the central bank could once again make bond purchases to help debt-troubled nations with their financing.

However, even this isn’t set in stone yet as Germany’s Bundesbank has objected to the idea, saying that it would provide the wrong incentives to debt-stricken countries.

Don’t disregard market expectations.

After Draghi promised to do “whatever it takes” to preserve the euro, markets began to climb in anticipation of a big move from the central bank. Look at your charts and see for yourself. Notice that huge rally from last week? Yup, that was because of Draghi’s comments!

With expectations set so high, traders could end up sorely disappointed if the ECB sits on its hands and fails to deliver a solution… and that could lead to huge EUR losses across the boards!

Do have a plan in mind.

Given the nature of the event, it’s not uncommon to see the market move sharply in one direction, then turn around and zoom in the other direction. This is especially true with the ECB press conference, where the audience is free to ask questions. This can lead to unscripted answers from ECB officials, which in turn could cause markets to zigzag wildly on the charts.

When the poop hits the fan, it will pay to have a trading plan to follow so you won’t be susceptible to impulsive actions. Remember to always use an appropriate stop loss!

Don’t blink.

The ECB rate decision and press con have been known to cause spikes in volatility and jumpy price action. EUR/USD can move over 100 pips faster than you can say “Ka-ching!” Just take a look at the July 5, 2012 rate decision. EUR/USD dropped from 1.2500 to below 1.2400 in roughly an hour.

EUR/USD Chart

Of course, trading the news isn’t for everybody. Doing so, especially with an event like this, takes a lot of guts because of the event risk it entails. If you’re not completely comfortable with trading the ECB rate decision, then consider sitting on the sidelines. There’s no shame in that. Always remember, having no position is a position!

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