Reaction to news events in foreign exchange trading is driven by expectations. A headline result that is above expectations leads to strength in the respective currency, while a headline result that is weaker than estimations results in a weakening of the respective currency.
Unfortunately, life isn’t that easy and there two general exceptions that traders should be aware of.
The Risk Factor
First, the US indicators tended to produce the opposite result for the dollar. The reason was the risk on / risk off mentality, whereas a weaker than expected US indicator leads to a strong US dollar (and a stronger Japanese yen).
The explanation is that a weaker US will lead the world down, and therefore, it is better to fly to safety – the safety of the US dollar. And when indicators exceed expectations, the world is set to improve as a whole, and no safety is needed and the dollar is sold. Risk is sought after.
This kind of behavior was seen for long periods of time in the period after the financial crisis. However, the never ending expectations for QE3 resulted in a return to “normal” behavior. Weak data raised QE3 expectations. Creating more dollars to buy bonds weakens the US dollar. And positive figures lowered the chances, strengthening the dollar.
If QE3 turns into reality (even though the Fed could take a different path), the question of QE3 will not exist anymore. So before QE4 will loom, we could see a swift return to the “abnormal” behavior.
Sell the Fact
The second exception is usually seen on a big event that has fewer possible results: an event such as a rate decision, where there is usually one main scenario. Of course, high expectations that don’t materialize lead to a disappointment. This is a natural fact of life.
There is another scenario, where high expectations do materialize. However, these expectations were priced in or even “over priced in” that any result leads to a sell off. This is often dubbed “buy the rumor, sell the fact”, and is relevant also when the event isn’t a rumor but a well-known scheduled and thoroughly debated event.
For example, a future rate cut in Australia may result in a rally for the Australian dollar if this event would be priced in. This is despite the usual behavior of a rate cut hurting the respective currency and despite reality meeting expectations.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Editors’ Picks
EUR/USD under pressure as yield climb weighs and Fed risk dominates
EUR/USD slides 0.05% as the week begins, courtesy of broad US Dollar strength, amid choppy trading as traders brace for the Federal Reserve monetary policy decision. At the time of writing, the pair trades at 1.1637 after hitting a daily high of 1.1672.
GBP/USD shuffles its feet as investors await key central bank moves
GBP/USD found little momentum on either side of the line on Monday, with the Cable pair churning chart paper just north of the 1.3300 handle to kick off a fresh trading week. Broad-market sentiment is largely hinging on an upcoming interest rate decision from the Federal Reserve due during the midweek, and investors are shunning stepping too far into either the bullish or bearish side in the runup to one of the biggest rate calls of the year.
USD/JPY remains capped by 156.00 amid renewed USD selling
USD/JPY is consolidating its uptick to near 156.00 in the Asian session on Tuesday. The US Dollar faces renewed selling pressure amid a cautious mood and dovish Fed expectations. Meanwhile, traders assess the potential impact of a strong earthquake in Japan. The immediate focus now is on BoJ Governor Ueda's speech.
Editors’ Picks
AUD/USD keeps range above 0.6600 ahead of RBA rate decision
AUD/USD holds its range above 0.6600 in the Asian session on Tuesday, stalling the overnight pullback from its highest level since September 18. The divergent RBA-Fed policy expectations act as a tailwind for the Aussie. The uptick, however, lacks bullish conviction as traders turn cautious ahead of the RBA rate decision.
USD/JPY remains capped by 156.00 amid renewed USD selling
USD/JPY is consolidating its uptick to near 156.00 in the Asian session on Tuesday. The US Dollar faces renewed selling pressure amid a cautious mood and dovish Fed expectations. Meanwhile, traders assess the potential impact of a strong earthquake in Japan. The immediate focus now is on BoJ Governor Ueda's speech.
Gold battles $4,200 amid risks over a hawkish Fed rate cut
Gold price trades cautiously around $4,200 in the Asian session on Tuesday. The precious metal traders remain wary amid concerns that the US Federal Reserve could adopt a hawkish tone in its rhetoric, despite delivering a rate cut on Wednesday.
Dogecoin, Shiba Inu test key resistance levels ahead of FOMC meeting
Memecoins Dogecoin and Shiba Inu are testing key resistance levels ahead of the Federal Open Market Committee interest rate decision on Wednesday. With market participants expecting a 25-basis-point rate cut, both memecoins could face pressure near key levels.
Big week ahead: Fed poised to cut as Canada, Australia and Switzerland hold steady
This week we get a lot of data releases but the biggie is all those central bank decisions. Canada, Australia and Switzerland are expected to stay on hold, but the Fed is expected to cut.
RECOMMENDED LESSONS
Making money in forex is easy if you know how the bankers trade!
I’m often mystified in my educational forex articles why so many traders struggle to make consistent money out of forex trading. The answer has more to do with what they don’t know than what they do know. After working in investment banks for 20 years many of which were as a Chief trader its second knowledge how to extract cash out of the market.
5 Forex News Events You Need To Know
In the fast moving world of currency markets where huge moves can seemingly come from nowhere, it is extremely important for new traders to learn about the various economic indicators and forex news events and releases that shape the markets. Indeed, quickly getting a handle on which data to look out for, what it means, and how to trade it can see new traders quickly become far more profitable and sets up the road to long term success.
Top 10 Chart Patterns Every Trader Should Know
Chart patterns are one of the most effective trading tools for a trader. They are pure price-action, and form on the basis of underlying buying and selling pressure. Chart patterns have a proven track-record, and traders use them to identify continuation or reversal signals, to open positions and identify price targets.
7 Ways to Avoid Forex Scams
The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?
What Are the 10 Fatal Mistakes Traders Make
Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.
The challenge: Timing the market and trader psychology
Successful trading often comes down to timing – entering and exiting trades at the right moments. Yet timing the market is notoriously difficult, largely because human psychology can derail even the best plans. Two powerful emotions in particular – fear and greed – tend to drive trading decisions off course.