EURUSD and ECB Preview – using past reactions to manage your own expectations

With the ECB interest rate decision due today, I figured it would help to study the past a little bit to get a gauge for what kind of volatility we can typically see in reaction to the announcement. I used the NewsTrader Pro 2.0 software (go to http://www.wincorp.net/ and then scroll way down to bottom of your browser screen) to see how the reactions have been lately.

Here are a few observations from my screenshot of the Newstrader Pro

·         Price reactions with >100pip ranges have been the “norm” since October 2010

·         The ECB press conference can introduce far more volatility than the release itself. The chart below shows how the EURUSD price dropped -100pips at the start of the press conference (it usually begins 45 minutes after the interest rate decision announcement is released).

·         The reactions in 2011 have been a bit of a see-saw. The data in the table below shows the 1st update of 2011 (Jan 13th) saw a +178-pip pop but then the next update in February (3rd Feb) saw the EURUSD tank 146-pips. If the see-saw pattern is to continue into the June 2011 announcement, then we could see a pop since May’s release was a 200pip tank that got the EURUSD’s nearly 1000-pip correction of May-2011 off to a rocking start.

What are some of my takeaways

·         Expect there to be volatility

·         The trend on EURUSD is up, so look for a reaction to the announcement and update that tries to continue the trend

·         Be nimble – be on alert for any disappointments/surprises that can trigger the “buy the rumor / sell the news” type of reaction or even a major reversal.

·         Be patient – the DIBS is a trade set up that often shows up on 5m, 15m and 30m charts AFTER there has already been a price reaction to the release. That’s not a problem, the DIBS is about finding an entry with defined risk rather than chasing every move.

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