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Buy the Rumor, Sell the Fact? ECB Preview

EUR/USD enjoyed the implicit and explicit talks about a rate hike in the Euro-zone. But now, as the moment of truth has arrived, the outcome for the common currency could be very different. Here’s a preview for the ECB rate decision, with 5 scenarios.

Rate Hike vs. Debt Crisis

In the previous press conference that followed the rate decision, Jean-Claude Trichet not only used the code words “strong vigilance” to describe future moves, but also explicitly explained these code words and said that a rate hike in April is likely.

Since then, most comments by Trichet (and there were many), as well as from other ECB members, repeated the strong vigilance message and spoke of a likely rate hike in April. Some words by Trichet were also analyzed as hinting about a big rate hike of 50 points, or a series of hikes.

The  likelihood  of a move on the rates became clear as Euro-zone inflation surprised by reaching 2.6%, getting further away from the 2% target.

This sent the Euro up, and kept it above 1.40 for quite a long time. This strength comes despite a deepening debt crisis. Ireland needs more money for its banks, Greece is close to a default, and the next domino, Portugal, doesn’t have a government any more.

All three countries have seen their yields on bonds rise to unsustainable levels. All of them also receive downgrades from credit rating agencies Moody’s, Fitch and S&P. The downgrades include sovereign, municipal and bank bonds.

All these troubles prevented EUR/USD from breaking above November’s all important peak of 1.4282. Very frustrating range trading has been seen in recent weeks, between 1.4030 and 1.4282.

This was finally broken one day before the big event – EUR/USD climbed above 1.4282 and settled in a safe distance above it.

The announcement of the new rate happens on Thursday at 11:45 GMT, with Trichet’s important press conference at 12:30.

Will it break now? Here are five  scenarios:

  1. 0.25% hike, unclear message: In this scenario, Trichet hikes the European Minimum Bid Rate by 0.25%, and doesn’t send out a clear message about future moves. This will likely result in a “buy the rumor, sell the fact” outcome, in which the Euro slides, and has a chance of losing the recently conquered level of 1.4282. Probability: high.
  2. 0.25% hike, clear message about making a series of rate hikes: By keeping the heat up with “Strong vigilance”, the Euro is likely to rise, with a chance of proceeding to the 1.4450 level. Probability: medium.
  3. 0.25% hike, clear message that this is a one time event: In this case, Trichet returns to the normal tone of “monitoring the situation”, which means no more hikes in the near future. This will likely result in fall of the Euro below 1.4282 and towards support at 1.4030. Probability: medium.
  4. 0.50% hike: In this scenario, the markets won’t wait for Trichet – the Euro is likely to move higher and can even break above 1.4450. The extent of the move will depend on his words, but this scenario is definitely Euro-bullish. Probability: low.
  5. No hike: Some members said that the move isn’t certain, so there’s still a small chance of this happening, although the higher inflation gives it a very small chance. In such a scenario, EUR/USD will lose 1.4030 very fast and Trichet’s words will become meaningless. Probability: very low.

What do you think? Where will it go?

For more technical levels, analysis and upcoming events, see the EUR/USD forecast.

* Post updated Wednesday, 17:15 GMT.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.