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Central Bank Trading: Pre-emptive ECB Trade

Bund and EUR/USD 25 October 2018

Central Banks don’t always deliver a surprise decision which can be frustrating when a great deal of effort has been put into preparation. Due to the preparation and build up to the decision, traders are inclined to trade whether a good opportunity is available or not; what this means is there are common price action patterns that occur and trade opportunities created by the increased positioning attempting to get paid something for the work done beforehand.

One common reactionary trade is the ‘Punt Trade’. The idea is to enter on the first comment in the second paragraph of the ECB statement (statement here) on the assumption that sentiment regarding inflation matches and continues the move. This gives an early entry but also risk that sentiment doesn’t continue and the market turns against the trade.

From the statement, the reference to “somewhat weaker than expected” gave the punt entry, however “remains consistent with…expansion” and “gradually rising inflation” contradicted the early sentiment giving a very fast cut and reverse, creating an exaggerated move lower. As this trade has been played for a number of months now, it is becoming crowded so the chance of getting out if it reverses is now diminishing.

In this AXIA Central Bank debrief, the Punt Trade is analysed in terms of its continued validity as well as a later opportunity arising from traders’ positioning for a continuation move which doesn’t come, showing that even without any major shift in policy from a Central Bank, trades are still available if patience to not dive in and a consideration of positioning are applied.

An entire week of the Axia Futures 8-week Trader Training Career Programme is dedicated to Central Banks and Event Trading, talking in efficient and effective preparation and execution strategies to maximise potential on such events.

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