An interesting fact is that one of the most intense trading sessions for EURUSD in terms of market volatility occurs on the day the European Central Bank has its official Press Conference. 100 pips movements are very usual on these occasions, so it will be very important to know how to make the most of it and take advantage of that huge volatility. This is why I am going to take it from scratch and explain how to approach the ECB Press Conference and how to adapt your trading strategies.
In the first Thursday of every month at 15:45 GMT, ECB announces its rate decision, which is the interest rate on the main refinancing operation that provide the majority of liquidity to the banking system. This event tends to be overshadowed by the ECB Press Conference held 45 minutes later as the rate decision is often priced in the market. The usual effect is the following, an actual value higher than the forecast is good for the EUR.
As an example, right now the rate is 0.25%. If ECB decides to raise the rate to 0.5%, this means investors will pay a higher price in order to borrow money, so the currency will be more expensive to have and the effect will be the appreciation of the EUR vis-à-vis the US dollar. Vice versa, if the rate drops, EUR will be cheaper to have in possession, so EURUSD fall as US dollar will be regarded as being stronger than the EUR.
As I mentioned earlier, 45 minutes after the ECB rate decision, the ECB Press Conference takes place with the ECB president Mario Draghi being the speaker. This is the primary method the ECB uses to communicate with investors regarding monetary policy. It covers in detail the factors that affected the most recent interest rate and other policy decisions, such as the overall economic outlook and inflation. Most importantly, it provides clues regarding future monetary policy.
At the moment, the principal concern of the ECB is to bring the inflation rate close to 2% (the actual value is 0.8%-0.9%). So, you should pay attention at his speech and the selection of words Mario Draghi uses. The press conference is about one hour ling and has two parts. First, a prepared statement is read, and then the conference is open to press questions. The questions often lead to unscripted and unexpected answers that create heavy volatility.
The key phrases Mario Draghi usually use in his speech and you should pay attention at are about inflation, unemployment and economic recovery: “unemployment stabilizing, remains high”, “downside inflation risks remain limited”, “we expect a prolonged period of low inflation”, “risks to economic outlook are on downside”, “economic recovery to proceed at a slow pace”. A more hawkish tone than expected is good for the EUR, so hawkish tone means EURUSD goes up and a dovish tone sends the EURUSD down.
A hawkish tone is usually associated with references made about a moderate to strong state of the economy, a stable unemployment rate and that inflation starts to pick up. For the dovish tone is the opposite situation. Having these aspects in mind, I think is of paramount importance to know how to “read” the ECB statements and it will help you to improve your trading strategies and being more profitable in time. Also, you will be able to adjust your positions during the press conference as one unexpected answer could come and in this way you will limit your potential losses. I am ending this article wishing you profitable trades and beware the markets mood.