Market volatility picked up since the beginning of the early morning hours today, despite the fact that all eyes are headed toward the ECB decision later today. Such volatility is likely to increase after the ECB announcement as well. In today’s article, we will take a look at the ECB decision, the possible scenarios, the impact on the Euro and what to look for in today’s decision
Definitions
Minimum Bid Rate: the Interest rate on the main refinancing operations that provide the bulk of liquidity to the banking system. The rate decision is usually priced into the market, so it tends to be overshadowed by the ECB Press Conference, held 45 minutes later. Source changed release frequency from monthly to eight times per year as of Jan 2015.
ECB Press Conference: The press conference is about an hour long and has 2 parts – first a prepared statement is read, then the conference is open to press questions. The questions often lead to unscripted answers that create heavy market volatility. The press conference is webcasts on the ECB website with a slight delay from real-time.
Why This Is Important
Short term interest rates are the paramount factor in currency valuation – traders look at most other indicators merely to predict how rates will change in the future.
The 6 members of the ECB Executive Board and 15 of the 19 governors of the Euro area central banks vote on where to set the rate, via rotation. The split of votes is not publicly revealed.
The press conference 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.
Expectations
There is a high possibility that the ECB might keep the rates unchanged in today’s meeting. However, there is also a high possibility for a change in the current QE program. There are many scenarios for such change, which also will have a various impact on the markets.
- Leaving The QE Unchanged: if the ECB decided to keep the current policy unchanged, this would be a notable disappointment for the market, as the recent rally in EU equities is based on hopes for an extension or to increase the QE. In return, the Euro may rise further, while equities may lose grounds with a possible 1-2% decline by the end of the day.
- 6 Month Extension: The current QE program should expire by March of next year. The ECB may decide to extend the duration of this program for another 6 months, to end by September of next year. However, the extension without increasing the QE would be another disappointment. In return, the Euro is likely to gain further, while equities may also lose some grounds.
- 6 Month Extension & Increase QE: if the ECB decided to extend the current QE and to add more liquidity, this would be very positive for equities –depending on the QE size- while the Euro may suffer for weeks and 1.0550’s might be at risk to be broken. However, such scenario is unlikely given the fact that inflation in the Euro Zone is at the highest in almost two years
Levels To Watch
| Symbol | S3 | S2 | S1 | Pivot | R1 | R2 | R3 |
| EURUSD | 1.0653 | 1.0680 | 1.0716 | 1.0743 | 1.0779 | 1.0806 | 1.0842 |
| EURJPY | 121.32 | 121.64 | 121.98 | 122.30 | 122.64 | 122.96 | 123.30 |
| EURGBP | 0.8348 | 0.8396 | 0.8457 | 0.8505 | 0.8566 | 0.8614 | 0.8675 |
| EURCHF | 1.0758 | 1.0783 | 1.0808 | 1.0833 | 1.0858 | 1.0883 | 1.0908 |
| EURCAD | 1.4093 | 1.4147 | 1.4188 | 1.4242 | 1.4283 | 1.4337 |
1.4378 |