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

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. Certainly, the decision most awaited by traders is the one concerning interest rates, which are the monetary policy instrument that has the most direct and high impact on forex markets. However, in the official ECB statements a trader can also find other useful information that affect currencies in the same way.

First, macroeconomic data. In fact, the final reports of the Governing Council usually include information on the current and expected inflation rate and the extent to which the statutory objective of achieving an inflation rate close to the 2.0% level is achieved or not. In addition, board members are used to write at least one sentence about what the ECB is planning to do to achieve this target.

From this point of view, forward guidance, the monetary policy guidelines set today for tomorrow, which represents a kind of formal commitment by the central bank to achieve certain objectives, explaining how these are to be achieved, is of fundamental importance. A characteristic element of a central bank’s forward guidance is the time factor, i.e. making it known how long a policy will be maintained. Time complements such as “for as long as necessary”, “until at least”, “to end shortly before”, and many others, widely used in the official statements, give precise time indications of what the central bank intends to do, in particular, to start or end a certain policy. Certainty, or uncertainty, about the time aspect is clearly a fundamental issue for traders investing in forex markets to know, as they can make predictions about future interest rates and money supply, thus updating their trading strategy for the short, medium and long term. Knowing how to interpret the forward guidance well is therefore key for implementing a profitable trading strategy.

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