Each month traders worldwide tune in for the European Central Bank’s monetary policy decision in order to speculate on potential trading opportunities. But what exactly is the ECB meeting, which forex / CFD assets does it affect and how does it shape the European economy?
What is the European Central Bank monetary policy meeting?
The aim of the European Central Bank monetary policy meeting is to set key interest rates and other policies that will maintain price stability across the euro area. ECB’s ultimate aim is to achieve an inflation rate of just under 2% across the eurozone. In addition to setting key interest rates, the Governing Council can achieve is optimum <2% inflation by applying quantitative easing (QE), which involves injecting money directly into the economy with the aim of boosting spending.
The Governing Council’s monetary policy meeting is held every six weeks and the council’s decisions are always announced via a press release at 11:45 am GMT, and are followed by an ECB press conference at 12:30 pm GMT.During the Press Conference, the rate decision is explained by the ECB President and indications of future monetary policy decisions are given. These statements are said to be either “hawkish” indicating further rate hikes, or “dovish”, indicating rate cuts. Generally speaking, higher rates make a nation’s currency more attractive to international investors and can therefore push prices higher.
It’s all in the hawks and doves…
As we have already established, hawkish and dovish are terms that refer to the general sentiment of the central bank. It is simply a way to refer to an overall outlook of the ECB, and the sentiment of its committee.
A hawkish stance is when a central bank wants to guard against excessive inflation by raising key interest rates. When money becomes more expensive to borrow, it slows the growth of the economy because it makes it harder for businesses to grow by using borrowed money to expand, and people will naturally spend less through borrowed money. When interest rates increase, that will usually cause the value of a currency to rise.
Dovish is the opposite of hawkish. This is when an economy is not growing and the government wants to guard against deflation. In other words, they want to stimulate the economy and encourage people to start spending more money on goods and services. To do this, the central bank will usually lower interest rates to make borrowing cheaper. Lower rates, will also usually devalue a central bank’s currency.
Why is the ECB so important for traders?
Traders and investors are particularly concerned about the impact of ECB policy on the price of EUR pairs, European indices, stocks and other affected assets. Many traders will therefore try to predict which way monetary policy is heading ahead of each meeting. As a rule of thumb, unexpected interest rate hike announcements push the EUR higher against its rivals while unexpected rate cuts can cause the EUR to tumble.
Source: Investopedia, Oct 16, 15:00 GMT