The ECB meets on Thursday amidst speculation that the central bank will indicate a future tightening of monetary policy.
Here's how to trade it.
- The ECB raised rates by 25 basis points on May 5th to 1.25%, but has recently been dovish in their commentary and attempted to reduce market expectations for additional hikes.
- The market is currently pricing in 1.5 more hikes by the end of the year.
The ECB economics staff is going to provide an update to their economic forecasts for the rest of 2011 and they will likely upgrade their assessments due to better than expected GDP data.
The key language the market is looking for is the use of "strong vigilance" on inflation.
- If this is spoken, it's an indication that the ECB will likely raise rates at their next meeting in July and the Euro will rally.
- Everyone is expecting this to happen.
- What they're not expecting is Trichet to back down from his supportive comments about Greek debt and default. This would indicate that the ECB is still not onboard for resolving Greece via a reprofiling of debt. This would mean a higher likelihood of a negative, market forced default.
This is why I want to fade the move higher.
We want to wait until Trichet says "strong vigilance", see a rally and then pick a spot to sell it before he comments on Greece.
What follows is a trade design, but the levels will have to be adjusted for what spot will be right before the meeting and the press conference.
Here's the trade:
Sell Euro/Buy USD
- Entry 1.4650
- S/L 1.4750
- T/P 1.4450
- 2:1 return
Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.
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