EUR/USD, ECB and Daily Interest Rate Trades

Upon Libor elimination, central banks not only revamped internal interest rates but the new method was to set daily interest rates to match exchange rates. Central banks in 2015 and 2016 embarked on radical and wholesale changes to currency prices.
Radical means they reduced daily trading ranges dramatically.

Pre 2014 for example, EUR/USD was allowed 75 to almost 100 pip daily trading ranges. Today, daily trading ranges were cut by easily 1/2.

To cut daily trading ranges by 1/2 also means a cut to weekly trading ranges. Assume for example 100 pip daily ranges factors to 500 pips per week in 1 direction but also means 500 pip are available to trade. Today’s reality to remain with the EUR/USD example is no longer such a concept as 500 pip weeks but we’re lucky to see 100 pip range week. The word volatility doesn’t exist post 2016.

Here’s what the ECB did to the EUR and here”s where wholesale changes come into effect.

Euribor 1 week -0.511 %
Euribor 1 month -0.482 %
Euribor 3 months -0.307 %
Euribor 6 months -0.158 %
Euribor 12 months -0.085 %

The interest rate range is 42 basis points and for current EUR/USD during new trading times isn’t terrible. Pre 2014, the 42 points was no such concept. Instead, around 100 basis points was the norm. Typical Euribor ranges daily from lows of 15 basis points to oh about 50. A 15 basis point range says automatically, don’t trade EUR/USD for the day because it won’t move and find another pair from another nation.

RBA for example contains a disastrous 13 basis point range, NZD/USD at a whopping 61 basis points and the FED and USD  at 138 .

What wholesale change meant was to cut interest rate ranges to transpire as cutting exchange rate ranges. A 42 basis point range doesn’t mean EUR/USD moves 42 pips because inside the EUR/USD range is supports and resistance points. And its assumed the full 42 points will actually trade. It never does.

For interest rate traders as well aren’t afforded the luxury to wide ranges and its mandatory today to be precise in trades as trade opportunities are extremely slim.

Due to the Fed’s 138 point range, this means USD/EUR is allowed a few more pips to ranges than EUR/USD at 42. The 138 pips however factored to DXY offers the exact same pip ranges as EUR/USD which means on paper the potential may trade 138 points in intetest rates but it never meets the expectation. The best seen is 1/2 at about 69 basis points and i’m addressing strictly exchange rate movements.

Despite the comparison to 42 Vs 138, its no longer necessary to factor yield spreads as was done from days of old pre 2015 and 2014. Because enough information is known from the ECB to factor a daily trade and because we are interested in EUR/USD straight. The USD as second part of the equation is also given by the ECB.

But also in comparison to exchange rate ranges as the same, this informs no difference to USD and FED Vs ECB interest rates. NZD and AUD assumes NZD contains wider ranges than AUD but actually AUD ranges beat NZD daily by 2 pips. Daily support and resistance points stop the full movements to exchange rates.

Day trades begin at 2:30 am EST and end at 10:00 am EST, a full 7 1/2 hours. Time change is coming then trade times change from 1:30 am EST to 9:30 am EST. For our day trades begin at the China open at 9:30 PM so we have trade and price coverage from 9:30 PM to 2:30 am. Time change coming means 8:30 Pm to 1:30 am.

Much more exists to day trades by interest rates but the basics are offered. Same story as weekly trades: no stops, charts, no market blah bull stuff and guaranteed profits.

Day Trades

From weekly trades we know 1.1183, 1.1212 and 1.1277 are vital points and all are dropping by the week. We know EUR/USD is overbought and short is the way. EUR/USD day trades are now set to either watch the daily trades as a benchmark to the 1.0980 weekly target and / or to profit from quick day trade pips while waiting for target to achieve. And shorts only.

Here the EUR/USD topside points 1.1151, 1.1157, 1.1164, 1.1171, 1.1185, 1.1192 and 1.1199.

Here’s supports and resistance points 1.1171 and 1.1184 and below 1.1102 and 1.1091.

EUR/USD failed below 1.1171 first resistance.

The target is 1.1199 but we know 1.1183 is massive resistance and no hope for today to trade to 1.1199. We know we are short and we want entry. EUR/USD dead stopped today at 1.1153. That’s the 1/2 point from 1.1151 to 11157 as 1.1154 is actually the 1/2 point.

EUR/USD failed below first resistance at 1.1171.

Now we are short.

Bottom supports 1.1116, 1.1102, 1.1101, 1.1091 and 1.1087. EUR/USD today dead stopped so far today at 1.1100. Dead on to 1.1102 and 1.1101. Only 1.1097 and 1.1089 remain.

In 5 hours of trading since 2:30 am, EUR/USD traded 53 pips.

Obvious the weekly target at 1.0980 won’t achieve today but pips were earned while waiting.

The strategy for remainder is now earn a few pips from longs with view to 1.1091 resolution. A break then targets 1.1087 and perfect long point. But 1.1097 works to target 1.1116. A quick 20 pips. Added to entry for shorts and 5 hours of trading was profitable.


Brian Twomey