ECB monthly meeting is scheduled for this Thursday. Last month was unprecedented. ECB President Mario Draghi made the deposit rates negative for the first time. What this means is that banks will be charging lenders for making the deposit. Something quite unprecedented. This was done to boost spending and fight off the deflationary pressures building in the economy. As such, few expect more from ECB President Mario Draghi on Thursday. “The ECB has announced a very comprehensive package and therefore I think it’s important to wait for the effect of these measures,” Gertrude Tumpel-Gugerell, former ECB executive board member, told CNBC.
As explained in the above video, inflation and unemployment are the two most important parameters for ECB. ECB acts when it thinks that market is not going the way it wants it to go. So if ECB thinks EURO is becoming too strong, it can intervene in the market with a policy tool that can weaken EURO. In the same manner, if ECB thinks that EURO is becoming too weak, it can intervene in the market and increase interest rates. Increasing interest rates makes the currency strong. Monetary policy is a double edged sword. You try to control inflation, unemployment goes out of control. And you try to control unemployment and inflation goes out of control. Don’t understand how monetary policy works? You can play Economia The Monetary Policy Game. Watch the video below that explains how!
If you are a EURUSD trader, then you must keep an eye on what ECB does. Whenever there is a press conference scheduled by ECB President take it seriously. This is the time when EURUSD pair can become very volatile. In the same manner, all economic news releases by ECB should be taken seriously. Did you read the post on Markets Versus Central Banks? Central banks are the biggest players in the market. Central banks have the power to print unlimited money. ECB has been using this power to print unlimited EUROs in an effort to avert the looming financial crisis in Europe. Understanding how the central bank works will help you anticipate most of the actions planned by the central bank before hand. This can help you understand the market better. So focus on the central banks like ECB and try to understand how it works and you will see you will be anticipating most of the moves being made by ECB. Did you read the post on how banks are still puzzling over ECB Grand Plan?