The interest rate decisions by the European Central Bank (ECB) are one of the most closely monitored economic news announcements among investors because these decisions have the ability to significantly move the markets.
Since it has such an impact on markets, ECB rate decisions also provide investors with unique trading opportunities due to several factors.
The first factor is that during such an announcement, volatility is significantly increased and there were times when major currency pairs like EUR/USD moved by more than 100 points.
ECB rate announcements also involve wider Forex and index spreads and higher speculation. The trading volume increases, as well as their volatility.
Essential Interest Rates
The ECB makes decisions on three types of key interest rates:
- The ECB refinancing rate is the most important type when it comes to commercial banks. This is because commercial bank refinancing options happen every week and during refinancing rate decisions the ECB makes changes on the cost of credit available to commercial banks.
- The ECB also makes announcements on the discount rate, which has a higher rate than refinancing because it’s used in emergency cases. For example, if a bank needs a loan, this is where the discount rate is involved.
- The third rate is the rate of return on deposits, which refers to the reserves capital that commercial banks pay to the ECB.
All of these rates are tools the ECB uses to control the economy and employ monetary policy. The aim of the European monetary policy is to control inflation and boost economic growth in the Eurozone.
How to Trade The ECB Rate News Events?
A popular approach among investors for trading the ECB rate decisions is the so-called carry trade strategy, which is used by all kinds of traders. The idea of this strategy is predicated on market conditions which serve as a connection between ECB interest rate and currency.
For instance, if the ECB interest rate that’s linked to a currency is low, investing in that currency is not recommended. Conversely, if the interest rate is high, investing in that currency could be a great opportunity. This is the main idea of the carry trade strategy.
Day Trading the ECB Rate Decision
The day trading strategy for the ECB rate announcements is a more complex approach and requires more experience.
The idea of this strategy revolves around attempting to take advantage of large movements in the Forex market over a short time frame. When employing this strategy, traders usually wait a few minutes after the rate announcement. In other words, investors wait until the market starts to fluctuate sharply before detecting the trend.
Waiting the few minutes after the announcement is crucial as it helps significantly mitigate the risk associated with the trade. Because the ECB interest rate publications have such an impact, the volatility often becomes so high that it can cause enormous losses to a trader if there’s no proper risk management strategy.
Additionally, higher volatility also produces a lot of false signals in the market, therefore being patient in such conditions is vital.
In conclusion, whether you’re new to trading or have some experience, understanding how major economic events such as ECB rate announcements influence the market is very important and knowing how to trade them can often yield substantial profits.
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