How to trade the ECB’s monetary policy

5 June 2016, 14:03
Sherif Hasan

The European Central Bank (ECB) has always been in favour of ‘talking’ the market up and making bold promises that inspire confidence, while at the same time avoiding a catastrophic collapse based on the actual fundamentals of the region and often messy political backdrop.

Recently however things have started to look even worse for the area’s economy and traders are beginning to wonder if the words of Mario Draghi are enough to keep the currency afloat any longer. With this in mind, we will look at how to trade this scenario and look for profitable opportunities amidst the confusion surrounding the markets often bullish attitude towards a currency that is clearly struggling fundamentally.

At the start of November 2013, the ECB cut its interest rates in response to bad inflation data released from the area. The CPI figure came out at a mere 0.7% which is far below its target. Since then the Euro has rallied against most major currencies.
The question on most traders’ lips is that if the ECB cut rates, and the currency STILL manages to strengthen how is one supposed to trade it based on the fundamentals?

The answer is in the data.

To get clear trading opportunities we need the data coming from the EU to be negative because the longer the data is negative the more chance there is of the ECB reacting with something even stronger than interest rate cuts; QE.

So far they have refrained from doing what almost every other central bank has done, which is injecting money into the markets in an attempt to shore up the system and spur growth in the markets. Instead they have opted for lighter measures which has convinced the markets that they have it all under control and the light at the end of the tunnel could be about to get brighter.

With this attitude in the markets psyche right now, there is very little reason to sell the pair, because any major moves down will see a sharp recovery based on this optimism. However the language of the ECB is starting get stronger and the German influence is starting to weaken.

This all gives us a fantastic trading opportunity, providing the data continues to show a lack of growth and performance in the European economy as a whole. As the weeks go by watch out for weak data and look to sell into this at key levels of resistance on the EUR/USD pair.


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