How to read the ECB's monetary policy decisions (part one)

The monetary policy decisions of the European Central Bank (ECB) represent one of the most awaited moments in the economic calendar of traders, as these decisions have a strong impact on financial markets and foreign exchange markets, in particular the euro-dollar one. Monetary policy decisions are taken by the Governing Council of the ECB, which normally meets every 5-6 weeks. The calendar of meetings is published on the European Central Bank’s website. Meetings end with the publication of an official statement, published on time at 13:45 CET on the day the meeting takes place. After the publication of the decisions, the Governor of the ECB holds a press conference at which he explains the decisions taken and, at the end, answers a list of questions from journalists. From the moment the official statement is published until the end of the press conference, the forex markets are particularly volatile, and the volatility is a function of the importance of the decisions taken and their unpredictability compared to what analysts expect.

But what do the official ECB statements contain and how should they be read by a trader? First of all, it is good to say that there is no default format for the statements, since this reports the decisions taken by the Governing Council, which vary from time to time. However, among the decisions taken there is always the one concerning the official interest rates, which in the case of the Eurozone are three: the one on the main refinancing operations, the one on marginal loans and the one on deposits. The statement always indicates the level of these three rates. The interest rate on the main refinancing operations (MRO), which provide the bulk of liquidity to the banking system, the rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem, and the rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem are always discussed by the Governing Council.

When these three rates, or only one of them, are changed, the forex market, in particular the EURUSD, moves immediately, depending on the choice made. If interest rates are raised, traders interpret the ECB’s move as restrictive, and therefore the euro appreciates against the dollar, because euro-denominated financial assets become more profitable, and therefore investors tend to buy them in greater quantities. As a result, the demand for euros to buy them increases. Conversely, if rates are lowered, the move is interpreted as expansionary, and therefore the euro depreciates against the dollar, because euro-denominated financial assets become less profitable, and therefore investors tend to buy them in smaller quantities. The demand for the euro decreases.

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