Spitting Thoughts : the ECB Interest Rate, do we understand it?
..and when I say we, I mean us retail traders without financial / economy background.
"More hawkish than expected is good for currency"
This is what stated in one of the popular website's economic calendar. How do you define more hawkish when it comes to this specific risk event? Is it just simply the headline number "ECB cut rates to 0.25%"? Is it all about the ECB's president speech afterward? What we know, the interest rate is the major mover for the respective currency in the long term. Meaning, what we understood as it would dictate the bearishness or the bullishness of the currency for the next few months or years.
If you just follow this website's basic interpretation of the risk event, that more hawkish means good for currency, and hence cutting or increasing rates unfortunately being assumed and oversimplified as binary for retail traders to latch onto. If ECB cut rates, it is "bad" for the currency (bearish) and if ECB increases rates, it is "good" for the currency (bullish). At least that is what I was taught.
You look at the chart on Nov 7th, 2013, the ECB cut-rate to 0.25% whilst the consensus (according to what was printed every website that has Economic Calendar) was 0.50%.
The general logic dictates that the Euro should be bearish. That day EURUSD was indeed having a major sell-off but look at what happened after that? EURUSD went up for the next 7 months.
A similar-ish thing happened (the surprise and the decision to cut the interest rate) on the 5th of June 2014 and the 4th September 2014 but the outcomes couldn't be any more different.
The ECB decision in June 2014, the price went up instead of down for the entirety of that trading month, albeit after EURUSD trending down for the last 4 weeks prior to the ECB rate decision. The ECB decision in September 2014, the price finally went according to the general logic that "cut rates = currency bearish", down. However, take a look at the trend at the time. EURUSD was in a bearish trend for the past 2 months prior to the ECB rate decision.
Whilst the headline numbers told us, retail traders, the same thing (surprise number, cut rates), the outcome was different. I believe in FUndamental Analysis and this post is by no means to disregard this side of the analytical spectrum but trading based on this risk event is too complex and above our "pay grade". We can see how it creates a spike? Then the least take away that I hope the readers would get from reading this is to NOT to trade EURUSD on the day of the rate decision. If you were already in a position on that day, CLOSE YOUR TRADE. "I have my stop-loss dude, I am good". Erm Wrong! Your stop loss will not be guaranteed to be filled at the price you are putting. SLIPPAGES happen. There's a signal today for EURUSD, trade it, by all means, just make sure you close it before the risk event.
"More hawkish than expected is good for currency"
This is what stated in one of the popular website's economic calendar. How do you define more hawkish when it comes to this specific risk event? Is it just simply the headline number "ECB cut rates to 0.25%"? Is it all about the ECB's president speech afterward? What we know, the interest rate is the major mover for the respective currency in the long term. Meaning, what we understood as it would dictate the bearishness or the bullishness of the currency for the next few months or years.
If you just follow this website's basic interpretation of the risk event, that more hawkish means good for currency, and hence cutting or increasing rates unfortunately being assumed and oversimplified as binary for retail traders to latch onto. If ECB cut rates, it is "bad" for the currency (bearish) and if ECB increases rates, it is "good" for the currency (bullish). At least that is what I was taught.
You look at the chart on Nov 7th, 2013, the ECB cut-rate to 0.25% whilst the consensus (according to what was printed every website that has Economic Calendar) was 0.50%.
The general logic dictates that the Euro should be bearish. That day EURUSD was indeed having a major sell-off but look at what happened after that? EURUSD went up for the next 7 months.
A similar-ish thing happened (the surprise and the decision to cut the interest rate) on the 5th of June 2014 and the 4th September 2014 but the outcomes couldn't be any more different.
The ECB decision in June 2014, the price went up instead of down for the entirety of that trading month, albeit after EURUSD trending down for the last 4 weeks prior to the ECB rate decision. The ECB decision in September 2014, the price finally went according to the general logic that "cut rates = currency bearish", down. However, take a look at the trend at the time. EURUSD was in a bearish trend for the past 2 months prior to the ECB rate decision.
Whilst the headline numbers told us, retail traders, the same thing (surprise number, cut rates), the outcome was different. I believe in FUndamental Analysis and this post is by no means to disregard this side of the analytical spectrum but trading based on this risk event is too complex and above our "pay grade". We can see how it creates a spike? Then the least take away that I hope the readers would get from reading this is to NOT to trade EURUSD on the day of the rate decision. If you were already in a position on that day, CLOSE YOUR TRADE. "I have my stop-loss dude, I am good". Erm Wrong! Your stop loss will not be guaranteed to be filled at the price you are putting. SLIPPAGES happen. There's a signal today for EURUSD, trade it, by all means, just make sure you close it before the risk event.
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