European Central Bank Meeting 22/01/2015 - What to Expect

The European Central Bank has complete control over monetary policy over the thirteen member states in the Euro Zone. Each month the ECB meets to keep inflation within the targeted levels.

Regardless of the ECB decides to raise, lower or maintain the interest rate levels, the decision always has an effect on Euro related Forex pairs. 

When the ECB increases the interest rates:

When the interest rate is increased, the ECB is selling government securities to large financial firms and these firms are paying for the securities in the Euro currency. This reduces the amount of the currency in circulation and decreasing supply to raise demand, and subsequently increasing the value of the currency. 

When the ECB decreases the interest rates:

In this case, the ECB floods the market with the Euro currency, which is done by purchasing government securities from financial companies. These transactions are paid for in Euro and therefore, increasing the amount of Euro in circulation.  because supply increases, the value decreases. 

How do Forex markets react to ECB interest rate decisions?

Before the interest rate decision is released, many traders operate in the market bases on rumours and speculation. This can create volatility even days before the decision is due. This in turn creates market movements that are ideal for scalpers and intraday traders. 

After the decision from the ECB, If the market’s expectations are different from the actual rate decision from the ECB,  there can be some excellent trading opportunities for savvy traders. 

For example, if there is an interest hike expected, but the ECB decides to cut the rate, there is a window of 1-2 hours where selling the Euro can be successful.

On the other hand, if there is a cut expected, but the ECB decides to increase the interest rate, traders may want to place a short-term long position on the Euro for 1-2 hours to benefit from the expected price movement.

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