How to Make Money From The ECB Meeting

A detailed preview of three market moving risk events for the week beginning 23rd July 2018.
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In this article, we will take a look at how you could profit from this week’s top three risk events.

Last week, monetary policy came back into focus with multiple CPI reports including the UK, EU and New Zealand.

Towards the end of the week, US monetary policy also came into focus following Trump’s comments.

According to CNBC, President Trump criticised the Fed for raising interest rates.

Trump stated that he’s ‘not thrilled’ with rate hikes and worries they will nullify his administration’s work.

Following the comments, ING stated:

‘The markets’ love for the US dollar was abruptly ended by a series of comments by President Trump on US interest rates and currencies. With the short-term USD fundamental dynamics starting to turn lower, these comments mark the end of the USD rally’.

This week, the market’s focus will likely remain on monetary policy. The main events will be:

  • Australian Consumer Price Index. This is arguably the most important event for Australia’s monetary policy outlook and hence AUD’s fundamental bias.
  • ECB Monetary Policy Decision. This will likely be the week’s main event and key to the outlook for EUR.
  • US Advanced Gross Domestic Product. This will be the first insight into how much the US economy grew by in the second quarter of 2018.

Wednesday, July 25

Australian Consumer Price Index – AUD

The first high conviction opportunity of the week will be Australian CPI for Q2. This event will consist of six key measures:

  1. CPI Q/Q
  2. CPI Y/Y
  3. RBA Weighted Median CPI Q/Q
  4. RBA Weighted Median CPI Y/Y
  5. RBA Trimmed Mean CPI Q/Q
  6. RBA Trimmed Mean CPI Y/Y

As numerous data points are all reported at the same time, this event has the potential to cause extreme volatility. As such, for an ideal trade, all data points should deviate in the same direction.

If the data prints mixed, there may still be an opportunity but of a lower conviction.

Market consensus is for CPI Y/Y to increase to 2.2% from 1.9% prior. Scotiabank points out that this will be the first time in a year, CPI has moved back into the RBA’s 2-3% target range.

Scotiabank believes ‘inflation should move in the direction of expecting eventual hikes but without providing immediate pressure’.

For this reason, we would argue that the fundamental bias for AUD remains comparatively neutral.

However, should become increasingly bullish as we move closer to eventual rate hikes from the RBA.

From a sentiment perspective, a strong deviation from CPI could provide a great trading opportunity.

If CPI prints better than expected, we would expect AUD strength, providing a long opportunity. Conversely, if CPI disappoints, we would expect AUD weakness, providing a short opportunity.

If the report prints mixed, we would expect initial volatility until the market comes to an overall consensus. Once again, this could still provide an opportunity, but of lower conviction.

Alongside the actual CPI report, we would also recommend keeping a close eye on trade war developments.

AUD has tended to weaken during times of increasing trade war concerns, and this could overshadow CPI.

The ideal trade will see trade war developments and CPI support one another. For example, increasing trade tensions and disappointing CPI would make for an excellent AUD short.

The above below chart shows Australian CPI Y/Y from Q2 2013 to Q1 2018.

australia-cpi

Thursday, July 26

ECB Monetary Policy Decision – EUR

The ECB’s Monetary Policy decision will be the highlight of the week. This event is key for future monetary policy in the EU and EUR’s future fundamental outlook.

At their June meeting, the ECB stated that the first rate hike would not be until at least the summer of 2019. However, market expectations vary widely with banks such as Scotiabank not expecting a hike until 2020.

Therefore, as the ECB is widely expected to announce no further changes at this meeting, the focus will be on the accompanying statement and press conference.

The market will be paying close attention to any comments on rate hikes in particular. Other areas of note will be EU inflation, global trade and the value of EUR.

If the ECB presents a hawkish tone, stressing the market is under-pricing chances of a summer 2019 rate hike, EUR should strengthen.

Conversely, a more dovish tone or failure to mention the market’s current bearish pricing could see EUR pressured.

Given Draghi’s typical dovish stance and skill in talking down EUR, we would argue the bias is likely to the downside.

Friday, July 27

US Advanced Gross Domestic Product

– USD

The final event of the week will be US Advanced GDP for Q2. This will be the first reading of three for US GDP and tends to be the most market-moving.

Wells Fargo expects a strong rebound in Q2 GDP. They expect GDP to print at 4.7% compared to Q1’s tepid 2.0%.

It’s worth noting that although the market as a whole expects a rebound in Q2 GDP, market consensus is for a print of 4.1%.

In either case, by all appearances the US economy continue to outperform, supporting expectations for further Fed hikes.

A strong report from Advanced GDP should support USD, providing a long opportunity. Conversely, a miss could see USD weaken.

Of course, politics has remained a dominating factor over recent weeks such as Trump’s most recent comments. As such, we recommend keeping an eye on any developments alongside data which may also influence USD.

Summary

Compared to most recent weeks, this week’s economic calendar is relatively light. The three events mentioned above are those most likely to move markets and result in high conviction opportunities.

Alongside, influencing current sentiment, all three events could influence their currency’s fundamental outlook.

Therefore, beyond the market’s initial reaction, we recommend considering the longer-term implications.

Of course, geopolitical developments are likely to remain as equally influential as data.

As such, any developments in Brexit, NAFTA or trade wars could also present some great opportunities.

The goal of this article is to help you improve your understanding and ability to trade risk events.

If you would like to learn more about risk event trading, please type your question in the comments below.

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