The European Central Bank (ECB) is the second central bank as of its importance in the overall global financial system as it is governing over the Eurozone different economies and sets the monetary policy for all of them based on interpreting past economic performances
It is considered to be the second one in terms of importance as the Federal Reserve of the United States sets the interest rates for the dollar, the world’s reserve currency, and therefore is being viewed as the major central bank in the world.
Nevertheless, despite the fact that it is created relatively in a short period of time, it is an active member of the Bank of International Settlements (BIS) and its messages make headlines in the financial press every time its Governing Council is meeting.
Speaking of the ECB Governing Council, this is presided by the ECB President and meets on a regular basis in order to set the pace of future interest rates and to adapt, if necessary, the monetary policy in Eurozone. Brokers like CornèrTrader warn traders when these economic releases are due.
The Governing Council is meeting every six weeks, on a Thursday, but until recently the meeting was being held on a monthly basis, still on a Thursday, namely the first Thursday in each and every month.
Needless to say that that week was extremely volatile as the Non-Farm Payrolls (NFP) release comes on the first Friday of each month so most of the times they were happening in two consecutive days and volatility was reaching higher levels.
Not anymore.
Between two ECB meetings, its members are making sure the message of the previous meeting is fully understood by markets. If not, during press releases, or participating in TV shows, holding speeches at different occasions, they re-iterate the right message and by doing that they are guiding markets to fully understand what the central bank intended to say at the previous meeting.
Nothing matter the most for Euro traders than what the ECB President (now Mr. Draghi) is saying at the press conference that follows the interest rate decision. This press conference is even more important than the actual interest rate decision as it may downplay the initial market reaction.
This press conference follows the interest rate decision and it starts shortly after the North American trading session begins.
There are two parts to consider. The conference starts with the President reading the ECB statement and the market will move aggressively on any mention regarding how the ECB is viewing future inflation and economic developments in the Euro-area (if the ECB staff is downgrading or upgrading its economic view, how the Gross Domestic Product – GDP is changing, etc.).
For the ECB, inflation matters the most as it is part of its mandate, to keep in below or close to two percent. Deviations from this level are being met with the central bank hiking the rates (if inflation moves well above the two percent target) or cutting the rates and easing the monetary policy if inflation is well below target.
Nowadays, inflation in the Eurozone is close to zero and in some cases below that level, and the threat of deflation (or negative interest rates as the central bank is calling deflation) made the ECB move the main interest rate below zero.
However, this may not be enough and if inflation is not picking up, further measures are necessary so-called unconventional measures. These measures take various forms, like quantitative easing (QE) programs (the United States ran for years various QE programs, Bank of Japan and Bank of England are actively pursuing such measures right now), targeted long-term refinancing operations (TLTRO’s) and even programs that have not been used so far, like the Outright Monetary Transactions (OMT) that have been in place to save the Eurozone when problems in Spain, Italy, and Greece dominated headlines.
Having said that, the statement the ECB President is reading is being scrutinized by high-frequency trading algorithms to see if there is any reference to what matters for moving the rates in the future: inflation, GDP, and any other possible wording that moves markets.
Sometimes the market is so aggressively positioned ahead the press conference, either bullish or bearish, that it will start a new move even before the ECB President starts talking.
The second part of the press conference deals with the President answering questions from press representatives. These questions are very difficult to answer as each and every word is scrutinized by trading algorithms and the ECB President has to choose what he says very carefully.
Just to give you an example, let’s assume that the interest rate decision has been bullish for the Euro as the ECB announced a rate cut. So all Euro-related pairs are jumping aggressively and forty-five minutes later the press conference starts.
While on the first half of the press conference the same move on the Euro pairs is expected to continue, the questions and answers session may be tricky. If someone asks if this rate hike will be followed by another one, and the answer is no, or not likely, then the forex market will completely retrace the initial reaction and the Euro will be sold aggressively.
This is how powerful the messages the ECB sends to market and why its members, and the ECB President in particular, need to choose the wording very carefully.
Bottom line is, the ECB actions are closely watched by other monetary jurisdictions around the world as central banks are interconnected even though different factors may affect the regions they’re governing.
What matters the most for currency traders is to know when central bankers are speaking and how to adapt the overall portfolio in such a way that it will incur little or no losses and will strive in the medium to long run.
