How Will The Euro Respond To The ECB Rate Decision?

The European Central Bank is scheduled to deliver its vote on monetary policy tomorrow; and the market is a little more interested in the outcome of this particular meeting than usual. Forecasts from economists and traders are in agreement as far as the immediate change in the benchmark lending rate. The consensus among economists (tallied by Bloomberg) is unanimous for a 25 basis point rate cut that would bring the main rate to 1.00 percent. Straying little from the path, the market is pricing in a slightly more than a 100 percent probability for an equivalent cut. However, this headline change was never the point of contention.

Where the Conflict Arises

An ongoing recession and lingering problems with financial conditions (along with the political pressures that come along with it) make an additional rate cut the natural choice. However, with tentative signs of a recovery in the making (at this point it is a slowdown in the economic contraction rather than a return to growth) and the financial markets enjoying months of stability; the needs for monetary policy beyond May have taken very divergent paths. In the past, the European policy authority has been hailed for its transparency and projecting the group’s intentions for the future. Through recent months though, central bank members have generated more confusion than they have clarity. Some (including Germany’s Weber) have supported a hold for easing at one percent while playing down the possibility of quantitative easing and other un-orthodox policy approaches. On the other hand, there have been those that have taken the line that the door should be left open for additional cuts and atypical efforts that have already been adopted by the Federal Reserve and Bank of England. Should the ECB take the same tack as so many of its major counterparts, it would be considered by the currency market an admission that conditions are perhaps worse than speculators are expecting and the recovery in the Euro Zone could be stunted due to all the policy that has been put in place.

What are the Scenarios?

There is a lot at stake for this central bank decision; and there are many small factors that can alter the market’s ultimate perception of the results. However, there will be a few specific themes that will be considered critical to the event. First and foremost, the market will look to the unambiguous rate decision at 11:45 GMT. The statement that accompanies the announcement on the refinancing rate is real driver. Any official announcements for changes in the deposit facility, plans to purchase private debt or potentially even the adoption of a quantitative easing-like effort will be presented to the market here. Then there is the ECB President and Vice President’s press conference with reporters at 12:30 GMT. President Jean-Claude Trichet will give more color on what to expect from the future for growth and policy as the public grills him.

This is a relatively simplistic breakdown. There are many nuances to this event and the market’s reaction under the various outcomes is highly uncertainty. At the same time, it helps to gauge what the broader market is preparing for in order to better prepare for an in-line or surprise response. So, to offer some benchmarks, let’s look over some of the potential scenarios and their probabilities.

1. The ECB Cuts by 25 basis points and does writes off neither further cuts nor un-conventional policy (65%)

This is by far the most likely outcome for this meeting. It has been the central bank’s stance since its inception to take slow and measured steps toward its policy. This helps to avoid market volatility and is somewhat necessary in applying policy that impacts many individual economies. At the same time, there are some points of nuance that can arise in the details. Extending loan maturities (something that was expected but not fulfilled last month) and the language surrounding future paths can spark volatility on their own. Status quo (no change to loan maturities or clear signal for a floor underneath rate cuts) could be a driver on its own.

2. The ECB Cuts by 25 basis points and indicates that it is shifting to a wait-and-see stance (20%)

Just a few months ago, the ECB defied expectations after signaling the group would hold off on any further rate cuts or policy shifts at the following meeting to see how previous efforts have impacted the economy and markets (when many other central banks were scrambling for options in addition to whatever easing they could afford). With a benchmark at one percent, there is little additional aid further cuts could afford. What’s more, recent signs of stability could negate the need to expand the money supply (or at least offer more time to assess the situation). Under this scenario, we will look for language that clearly states that there is no cut due in June nor are any additional measures outside of the norm necessary.

3. The ECB Cuts by 25 basis points and makes a definitive shift towards un-orthodox measures (15%)

There is little doubt that the central bank will lower its benchmark by 25 basis points; but does the European economy need additional help to prevent deeper recession? This is the outcome should the answer to this question be ‘yes.’ A rate cut will be followed by language that leaves the door open to further cuts (more inflammatory would be rhetoric that suggests it is necessary). Going one step further would be to admit that further effort must be made outside the normal channels. Least surprising would be an extension of loans. Then, there is the chance that they will take up the purchases of private debt. Most unlikely is announcing outright quantitative easing.

4. Other (5%)

This is the catchall category of those possibilities that are considered very unlikely. A cut that is greater than 25 basis points, no cut at all, or the adoption of many unorthodox tool as once have low probabilities. Of course, if they happen, the response from the currency market would be tremendous.

What Currency Pairs To Watch


This pair is on the cusp of a major breakout. Earlier this week, a rising trend that fought the receding highs was taken out to remove any semblance of a bullish bias. Now, we are left with a wedge formation that yearns for a breakout regardless of the direction. From a fundamental stand point, the euro is still significantly more valuable than the economical battered pound. Should the ECB take a more active role in policy, it could bring the Euro Zone down to the level of the UK.


The world’s most liquid currency pair, EURUSD also happens to be a key gauge for risk appetite. This means that the Euro Zone’s pace of monetary policy could be disrupted by the Fed Stress Test results that are due later in the US session on the same day. However, the technicals are appealing. On Monday, a long-term falling trend was cleared; and now spot is treating that break level as support. The bullish sentiment will have to be significant for EURUSD to run the 200-day SMA rather than reverse.


EURCHF presents another clear wedge that demands a breakout. There are outside factors working against this pair. The Swiss National Bank has stated its plans of FX intervention to prevent further appreciation of the franc multiple times. On the other hand, the two economies are closely tied and policy made by the ECB is often mirrored by the SNB. This could be a complicated reaction.

Written by John Kicklighter, Currency Strategist
Article Source - How Will The Euro Respond To The ECB Rate Decision?
How Will The Euro Respond To The ECB Rate Decision?SocialTwist Tell-a-Friend

What is Forex?

If you would go out on a dinner with your friends or family and you mentioned that you were trading on the Forex market most of them wouldn’t know what you were talking about. The worst thing is that most of the Forex traders that join the Forex market don’t know what they are doing. Understanding what Forex is, is the first good step to your success at Forex trading.

The foreign exchange market (Currency, Forex, or FX) is where currency trading takes place. It is where banks and other official institutions facilitate the buying and selling of foreign currencies. Forex transactions typically involve one party purchasing a quantity of one currency in exchange for paying a quantity of another. The foreign exchange market that we see today started evolving during the 1970s when world over countries gradually switched to floating exchange rate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Today, the Forex market is one of the largest and most liquid financial markets in the world, and includes trading between large banks, central banks, currency speculators, corporations, governments, and other institutions. The average daily volume in the global foreign exchange and related markets is continuously growing. Traditional daily turnover was reported to be over US$3.2 trillion in April 2007 by the Bank for International Settlements. Since then, the market has continued to grow. According to Euromoney's annual Forex Poll, volumes grew a further 41% between 2007 and 2008.

Forex Turnover

Forex Turnover
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.
The purpose of Forex market is to facilitate trade and investment. The need for a foreign exchange market arises because of the presence of multifarious international currencies such as US Dollar, Pound Sterling, Yen, etc., and the need for trading in such currencies. Since you aren’t buying anything physical this kind of trading can be confusing. When buying a currency think of it as buying a part in that particular country’s economy because the currency rate reflects the economical situation of the country when compared to others.


List of most popular currencies on the Forex market

Forex used to be a closed market because only the “big boys” because you needed between 10 and 50 million $ to open an account. But today, with the development of internet, online Forex brokers have the possibility to offer their services to “little” traders. All you need to start is a computer, fast internet connection and information which you can find on this page also.

This enormous market is like the dangerous sea where you can meet lots of sharks and dangerous waters but at the same time it is the only one where two weeks of trading can hypothetically bring you $1,000,000 out of $1,000 of initial investment.

This is certainly hypothetically because a lot of newbie traders deal with their trades as gambling, that surely bring them to having nothing in the end. You should always keep the phrase "be careful!" in your mind. This market would give you its profit possibilities only if you learn the basic things hard and make lots of demo trading.

The statistics is that as much as 95% of traders come to losing their money at Forex, 5% have profit and less than 1% of traders make large fortune at Forex. You shouldn't produce, sell or advertise anything trading at Forex. Your assets are your knowledge, experience and a small amount of cash.

This market is a platform for banks, transnational corporations and individual traders to change the currencies they possess into other ones. This is the spot Forex market. At this market you can trade with up to 1:400 leverage which means that you'll get $400 on your account for each dollar invested. So, you can trade with the $400,000 sum having invested $1,000 onto your account.

Forex is unique among other world markets because in any time of day and night, somewhere in the world, a financial centre is open for business, banks and corporations exchange currency all the time, with a little lower frequency during the weekend.

Why to trade on Forex?

1. There is no commission fee for trading at Forex.
2. There is no intermediary, you can trade directly at Forex.
3. Forex is open 24-hours a day.
4. Nobody can influence the market for a longer period.
5. High liquidity.
6. Free demo accounts, analysis and charts.
7. Small accounts that allow everyone to try out his luck.

Hope this has answered a lot of questions you were asking yourself about Forex and that you can now start trading. Also make sure that you check out other articles on this blog which can help you earn your fortune.

Good luck to everyone!