Wednesday, January 21, 2015

BoE Minutes provide Forex trade win | Markets in a tizzy ahead of ECB meeting

The minutes of the January meeting of the Bank of England’s Monetary Policy Committee (MPC) were released yesterday at 9:30 GMT. The OmiCronFX algorithmic routine, Mandelbrot, was poised and waiting for the outcome to be reflected in the exchange rate of the Pound Sterling.

The minutes showed that two members of the committee, Mssrs. Weale and McCafferty, who had, since last August, been consistently voting for a rise in interest rates, had changed their stance and were now in favour of waiting. This meant that the decision to hold was unanimous. The market reacted accordingly, making down the GBPUSD pair on the understanding that a rate rise by the Bank of England is now as far into the future as ever. Maybe even more so. The minutes show that the change of mind on the part of the former “dissidents” had been brought about because of the falling inflation statistics.

The Mandelbrot algorithmic routine placed a trade a few seconds after the announcement, on the short side (expecting the pair to continue falling). This achieved two levels of profit before the rate reversed and the remainder was stopped out at the price point at which the trade had been initially entered.

We are very proud of the manner in which Mandelbrot can react to events such as this. The move down in this case was short lived, but extended trends are often started by just such a movement as was seen here.

Forex market in a tizzy ahead of ECB meeting

If your commentator had a Euro/Dollar/Pound/Yen for every time he heard that a market event was the “most anticipated ever”, he would be a wealthy man. On this occasion, however, such language, being bandied about by market pundits, just might have some validity.

At 13:30 GMT today, Mario Draghi, President of the ECB, will make that institution’s latest monetary policy statement, to be followed by a press conference. Forex traders will hang on his every word. There will, very likely, be extreme and sustained short term volatility in currency exchange rates, especially in those pairs that include the Euro, during and immediately after the statement and while he is speaking to journalists.

Even yesterday, at the time of the open of the New York session, a story appeared on the Dow Jones Newswire to the effect that the executive branch of the ECB governing council had prepared a document for discussion (ratification?) at the full council meeting today, which puts forward the possibility of a QE package that would entail the purchase of €50 Billion of Eurozone sovereign bonds per month, for a period of at least a year. This was enough to put the Forex market into a tizzy of excitement that sent the EURUSD pair off in all directions, only to come to rest pretty much exactly where it had started off (see chart above).

The market is expecting an announcement to confirm that the Eurozone has joined the QE club, that august gathering of central banks that have embarked on an activity that has various euphemisms such as ‘economic stimulation’, ‘balance sheet enlargement’ and ‘Quantitative Easing’, but which boils down in the end to conjuring up money from nowhere, courtesy of the printing presses at the various mints around Europe. It has marked down the value of the Euro to a significant degree in anticipation.

Something of that sort will undoubtedly be announced. However, in the Eurozone, nothing is simple. There are countervailing forces at work, which could result in so much compromise that the market will be disappointed.

And no, OmiCronFX was not in the market when the volatility occurred yesterday.  After lunchtime (GMT), and the close of our Cable (GBPUSD) trade, we decided to wait for the dust to settle after the ECB announcement and press conference later today before we sent Mandelbrot off looking for more trades.

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