The euro dollar exchange rate is one of the most stable in the forex market. It often remains around at the same level for a fair number of days, if not weeks. However, there are particular situations in which even this currency pair moves a lot. These include, among others, meetings of the European Central Bank, in which the Governing Council takes decisions on interest rates and on the money supply. For some years now, thanks to the international crisis, the decision to purchase government bonds has also been added to the decision elements of the Frankfurt monetary authority, otherwise known as quantitative easing.
The monetary easing is part of the instruments that characterize the expansionary monetary measures. A trivial rule of thumb states that an expansionary monetary policy always causes the depreciation of the domestic currency and the appreciation of foreign currencies. Thus, the euro dollar exchange rate is affected by a change in this type of monetary policy.
The real trouble, or opportunity, for traders is when the central bank announces the program. It is immediately after this announcement, in fact, that chances of gain are maximized but also the possibility of loss. In the minutes / hours before the announcement, instead, it is useless to hope to make profits. No trader, in fact, operates before the central bank’s decision, and the market is static.
The announcement is different. Let’s take, as a case study, the decision taken by the ECB yesterday, when central bankers lowered the interest rate on deposits by ten tenths of a point and restarted the purchase of government bonds at the pace of € 20 billion per month. If we look at the chart, for example the one with a 15 minute timeframe, which was formed in the seconds following the publication of ECB decisions, we can easily see that the opening of the bar took place at 1.1021; immediately afterwards there was a sudden surge towards 1.1066 (+45 pips) and then, a few seconds later, an equally sharp retracement to 1.0961 (-105 pips), to then close at 1.0967.
An excursion of 105 pips in a few seconds in the EURUSD pair is an exceptional event on the forex markets. The sudden variations depend on the purchase/sale operations entered by the traders immediately after reading the decision. For this reason, it is important for a trader who wishes to operate in that circumstance to read immediately the statement published on the ECB’s website.
It also often happens that a statement is interpreted in a more dovish or hawkish manner by most traders, who then realize that the monetary policy stance is more or less restrictive / expansionary than what initially expected, so that retracements are observed. For these reasons, it is good to always remember that the high volatility of the EURUSD depends on the feeling spontaneously formed in the market, and that this could change depending on the interpretation that traders give to the central bank’s decision, minute after minute.