What is the European Central Bank?

The European Central Bank (ECB) is the central bank of the Eurozone, a collective of European countries that use the euro as their sole official currency. The ECB is responsible for administering monetary policy and safeguarding the value of the euro. Given the relative size of the Eurozone economy, actions undertaken by the ECB garner nearly as much attention from U.S. traders as the actions of the Federal Reserve.

The ECB is governed much like the Federal Reserve. Decisions are made by the Governing Council, which consists of six members of the executive board, plus the governors of the national central banks of the euro-area countries.

Developing Monetary Policy

This Governing Council is responsible for assessing economic and monetary developments and meets every six weeks to set monetary policy for the Eurozone. Monetary policy decisions are published in a press release on the day of the Governing Council policy meeting. Following this release, a press conference begins and the ECB president makes a statement and answers questions from journalists to further clarify policy decisions.

In order to foster transparency, the ECB also publishes an account of the Governing Council’s monetary policy discussions prior to the next meeting, allowing public review of the rationale behind ECB decisions.

ECB Monetary Policy and Trading

Members of the ECB try to be as proactive as possible in managing market expectations and preparing traders for a shift in monetary policy. The executive board of the ECB must often try to unify the differing motivations of the national central bankers into a centralized monetary policy. For this reason, a trader must carefully parse any statements made by the ECB president, who is responsible for sending a consolidated message about overall euro policy.

There are a number of factors to think about when trading ECB policy decision announcements, but with a little insight and thorough preparation, these announcements can provide numerous opportunities for traders.