How the ECB Decides: Governing Council and Market Reaction

[Fairman]

How the ECB Decides: Governing Council and Market Reaction

The European Central Bank sets policy for the euro area, but its structure differs from that of the Federal Reserve, and understanding it helps in reading its decisions.

The Governing Council makes the monetary policy decisions. It includes the six members of the Executive Board and the governors of the national central banks of the euro area countries. Decisions are announced after the meeting, followed by a press conference by the President, who answers questions for about an hour.

The press conference matters as much as the statement. Markets parse the President's words for hints about the path of rates and the balance of views on the Council. Statements about "meeting by meeting" decisions or being "data-dependent" signal flexibility.

The ECB also publishes economic projections, prepared by staff, and accounts of its monetary policy meetings a few weeks after each meeting, which show the range of discussion.

Divergent views between countries sometimes surface. Hawkish members, often from northern countries, may push for tighter policy, while others worry about the effect on heavily indebted economies.

The ECB has also introduced tools to prevent excessive differences in borrowing costs between member countries, which matter for the stability of the currency union.

For traders, the combination of the decision, the statement, and the press conference creates a multi-phase reaction, often with reversals.

Practical step: for the next ECB meeting, note the price at the decision, the start of the press conference, and the end, and compare.

[Fairman]

The three phase reaction is very real. I've stopped judging an ECB day by the first candle after the decision. The press conference is where the move usually gets decided. The decision comes out at 2:15pm Frankfurt time and the press conference starts half an hour later, so for us in Lagos that's 1:15pm and 1:45pm during European summer time. The first part of the press conference is the prepared statement, which usually repeats the decision. The real information tends to come in the questions, when the President is pushed on what happens next. I'd wait until at least twenty minutes into the Q&A before taking anything on EURUSD.

[Fairman]

Sources stories are worth knowing about too. A few days after meetings, reports of what council members privately think sometimes move the euro more than the meeting did. They usually come out through the big news wires with headlines like ECB policymakers see growing case for something, and they can appear at any time of day. If EURUSD suddenly jumps twenty or thirty pips with nothing on the calendar, check the headlines for one of these. They're often a way for members to prepare markets for the next meeting. So the week after an ECB meeting isn't necessarily quiet for the euro, and holding a tight stop through it carries more risk than it seems.