Reality versus Expectation in FOREX Trading

The degree a currency pair reacts to a news release is a function of the difference between what was expected and the actual number. All other things being equal, the greater the difference, the greater the impact on prices.

Perception is everything.

Some releases have almost no impact; others have substantial, immediate, and ongoing consequences.

In Figure below, you can see the release of the Consumer Price Index (CPI) had no impact on the EUR/USD.

In another Figure (Nonfarm Payroll -- EUR/USD), you can see the nonfarm payroll (NFP) had an enormous impact on the EUR/USD.

[caption id="attachment_13144" align="aligncenter" width="550"]Consumer Price Index -- EUR/USD Consumer Price Index -- EUR/USD[/caption]

[caption id="attachment_13149" align="aligncenter" width="550"]Nonfarm Payroll -- EUR/USD Nonfarm Payroll -- EUR/USD[/caption]

Violent price spikes of 100 to 200 pips are not uncommon; nor are almost immediate reactions in the opposite direction of the same or greater magnitude. An announcement by the Swiss National Bank caused a 400-to-500-pip swing in some CHF pairs in the fall of 2011. See Figure

By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2020. Content published with author's permission.

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