Heads up, forex traders! The ECB and the BOE are scheduled to announce their policy decisions tomorrow and here are some things to remember when coming up with your trade strategies:
1. Both central banks are feelin’ downbeat.
Just a quick glance at the euro and pound pairs is enough to tell that both the ECB and the BOE are feeling downbeat about their economic prospects. While ECB Governor Draghi and his men have already unveiled aggressive stimulus measures a few months back, BOE Governor Carney has recently shifted to a more cautious stance in saying that rate hike expectations have to be pushed back.
Don’t get me wrong though! BOE policymakers aren’t really looking to ease anytime soon, as Carney clarified that their next move is still likely to be a rate hike. It’s just that their change in rhetoric pulled the rug from under the pound’s feet, as the BOE is no longer one of the major central banks likely to hike rates early next year.
As for the ECB, Draghi has repeatedly emphasized that they are ready to expand their easing efforts if necessary, as the central bank is keen on bringing their balance sheet back to 2012 levels. Talks of actual quantitative easing have been on the table, although policymakers are still exploring other options that could boost inflation.
2. ECB statement might spur more action.
Based on past price movement, it seems that the ECB statement tends to spur more action compared to the BOE rate decision. This is most likely because the ECB event is followed by a press conference that usually sheds more light on the latest decision while the details of the BOE statement aren’t available until the minutes of the meeting are released a couple of weeks later.
Besides, between the two central banks, the ECB has a higher likelihood of taking action anyway. BOE Governor Carney and his gang of policymakers seem inclined to sit on their hands and wait for economic data to improve. On the other hand, Draghi appears to be in a more desperate position, pulling out all the stops in order to shore up the euro zone economy.
3. Weak euro zone and U.K. inflation
What’s common between the euro zone and the U.K. economies is that inflation is being stubbornly weak. The euro zone CPI flash estimate for November released last Friday revealed that headline inflation slowed from 0.4% to 0.3% while core inflation held steady at 0.7%, mostly due to falling oil prices.
In the United Kingdom, the headline CPI ticked up from 1.2% to 1.3% while the core CPI held steady at 1.5% in October. Annual inflation is still way below the central bank’s 2% target and is teetering close to the 1% mark, during which BOE Governor Carney has to write a letter to the Chancellor explaining the downturn in price pressures.
4. Crosses might offer better trade opportunities.
If you’re looking to grab some pips of these central bank events but would rather stay away from the oversold dollar pairs, you might wanna pay more attention to the currency crosses instead. After all, most forex market participants might be hesitant to put in large positions on the dollar ahead of the NFP report due at the end of the week.
Trading the euro or the pound against the commodity currencies might be interesting, as comdolls have been selling off aggressively lately, thanks to the Swiss gold referendum and the OPEC decision. With that, these pairs could offer better entries and return-on-risk if you’re short-biased on the European currencies. Just make sure you adjust your stop losses to account for the extra volatility in these crosses!