Market Insights

Trading Insights: EURO volatility - ECB to engage in guessing games

Skilling Writers Team
2023-03-16
- News
- Trading

Market Talk

The ECB president Mrs. Chistina Lagarde will no longer hold your hand… the end of forward guidance is near?

Today’s main event

1:15 GMT: The European Central Bank (ECB) will announce its March interest rate decision

Commentary:

Regardless of the current banking “crisis” the ECB will most likely have to keep hiking rates to get inflation under control
Current ECB rate is 3% and after today’s expected 0.5% rate increase the rate will be at 3.5%
Looking forward a few months from now it remains possible for the ECB to hit 5% and even beyond

Mrs. Lagarde (ECB president) could start a new game of “guess our next move” as soon as today

Since the start of the ECB’s current hiking cycle, Mrs. Lagarde has provided markets with explicit guidance about the ECB’s next steps, such as the +0.5% expected hike today, Lagarde has announced she will hike 0.5% in March already

However, if memory serves correct, Mrs. Lagarde has not always followed through with her “forward guidance”.

Sure, the facts can change after a “forward guidance” announcement, so traders should not always place all bets on what a central banker says they will do.

Bottom line:

Expect even higher market volatility across FX land

It's likely that Mrs. Lagarde has read and heard about some of the papers and online comments that have called her an amateur central banker. It's fair to say with the increased market uncertainty in the background, and in order for the ECB to avoid any more embarrassing situations, that for the next few meetings, we can expect no more explicit guidance from the European Central Bank.

EURO FX land traders, you're on your own… good luck.

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Upcoming Key Economic Events

Today European Central bank (ECB) interest rate decision

0.5% hike is on the table unless an “event” triggers the ECB to evaluate the economic risk higher interest rates will have on the EU economy. Perhaps the SVB collapse is something the ECB should consider as a warning for EU banks?

Low probability high risk event if the ECB surprises markets with a smaller than 0.5% hike or makes no explicit guidance about its plans for future rate decisions.

Time: GMT+0	Country/Region	Economic Indicator	Previous	Forecast	Actual	Units
12:30:00 AM	Australia	Unemployment Rate	3.7	3.6	3.540562	%
7:00:00 AM	Norway	GDP m/m	0.4	-	-0.2	%
7:00:00 AM	Norway	GDP Mainland m/m	0.4	-0.2	-0.2	%
12:30:00 PM	US	Housing Starts	1.309	1.31	-	-
12:30:00 PM	US	Building Permits	-	-	-	-
12:30:00 PM	US	Initial Jobless Claims	121	-	-	-
12:45:00 PM	Euro area	ECB Deposit Rate	2.5	3	-	%
12:45:00 PM	Euro area	ECB Refinancing Rate	3	3.5	-	%
12:45:00 PM	Euro area	ECB Lending Rate %	3.25	3.75	-	%

Cross asset bullet points:

German Germany 40 Index current price seems to be reacting to the support at 14,740. The fact that price has found support at the 50% retracement from the 13 week high low at the intersection point on the prevailing multi-month uptrend line (see chart 1) further increases the prospect for the index to continue in the direction of the prevailing uptrend for targets 15,920 and 16,850 as extension. Downside risk seen below the 13,380 support which if price falls below would indicate a bear market trigger.

EUR/USD multi-month uptrend remains intact but price remains vulnerable to the key support at 1.0525, the fact that price did pierce below the 1.0525 level yesterday does raise the risk that there could be another attempt for price to test the 1.0525 support. A clean break below the key support could trigger a further downside push towards the 1.0440 which can be considered as an important support since the 1.0440 does intersect at the prevailing multi-month uptrend line.