A quick glance at the economic calendar reveals that the forex market may be waking up a recently dormant market. Volatility fell to levels not seen since March 2021 reaching 17.80. Today that could change…
What can we expect from today’s ECB decision?
Here is the baseline scenario for the ECB decision:
- Deposit rate unchanged at -0.5%
- PEPP purchases unchanged at €85 billion in Q3.
It was already expected a few weeks ago that this would be the meeting at which the ECB would announce a reduction in bond buying. However, a number of speeches by ECB speakers in the run-up to the black out have caused these expectations to diminish.
We can consider as many as 4 scenarios for the EUR after the ECB decision announcement ( by forexlive) :
- ECB cuts interest rate. Noticeably stronger EUR
- The ECB may “reduce PEPP purchases as part of the summer slump” by reducing purchases in July and August. This could be misinterpreted as ‘tapering’, which would result in volatile EUR action. Possible EUR upward spike and pullback.
- Change in language to “more balanced” risk (as opposed to ” with a downward bias). Increase in EUR strength.
- Changes forecasts pointing to an improving economy. Strong EUR.
These are possible options, but point to major issues ahead of the ECB rate meeting. Some seasonal factors for EURUSD could also influence how the market reacts after today’s ECB decisions.
In the last 10 years, the EURUSD has lost value 8 times between June 13 and June 26. The biggest loss occurred in 2013 and was -2.71%. . ECB’s clearly bearish stance could be a great opportunity to take advantage of this seasonal weakness.
Let’s also keep in mind that 45min later at 14:30, when the ECB press conference starts – there will be US inflation data, which may dominate the mood and reverse the trends caused by the decisions of 13:45.
The estimate for US CPI in May is for the annual reading to tick higher from +4.2% y/y in April to +4.7% y/y. Meanwhile, the core reading is estimated to climb from +3.0% y/y in April to +3.5% in May.
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