Chapter 6

Understanding and Applying Market News and Information

In This Chapter

Getting up to speed on market developments

Finding the news, information, and data

Making sense of it all with themes

Anticipating data and market reactions

As Roseanne Roseannadanna used to say, “It just goes to show you. It’s always something. If it’s not one thing, it’s another.” Okay, maybe we’re dating ourselves with a reference to the classic Saturday Night Live “Weekend Update” commentator, played by Gilda Radner way back in the 1970s, but her tagline fits the forex market nicely.

Any number of real-world forces are at work in the forex market at a given moment — economic data, interest rate decisions, and geopolitical events, to name just a few. And they all get filtered through the market’s collective consciousness and translated into price movements.

As currency traders, we’re focused on trying to make money based on those price movements, but we’re not alone. A whole raft of participants is active in the currency market, and they’re all analyzing the same news and data, and drawing differing conclusions. To add yet another dimension, they’re making trades based on those conclusions, which is what ultimately moves currency prices.

Which brings us back to the observation: If it’s not one thing, it’s another. The “other” in this case boils down to how markets process information — and there’s a lot of it. We’ve spent years in the forex market as traders, analysts, and strategists, and just when we think we’ve seen it all, something new and unexpected comes along. So you’re not alone when it comes to having to sift through the mountain of information and make trading decisions.

Your aim is to avoid paralysis by analysis and to absorb and understand as much as you can about what’s driving the market, all with the goal of making successful currency trades. Our aim is to give you a better understanding of the types of information that move the market and a solid foundation to interpret and apply that information.

Sourcing Market Information

The jumping-off point for the discussion of market information has to be getting the market information in the first place. Institutional traders have teams of economists, analysts, and strategists providing them with up-to-the-minute observations and interpretations. Does this give them an advantage? Not necessarily. In the big picture, most of the information they’re getting is available to individual traders, but you have to make the effort to find it, read it, and understand it.

The art of boarding a moving train

Anyone who’s ever tried to jump on a moving train knows you have to start running alongside it before you reach out and try to grab hold. If you’re standing flat-footed and you try to grab on, you’re likely to get your arm ripped off. The forex market is no different, and any trader who tries to jump in without first getting up to speed is asking for trouble.

Getting up to speed in the forex market means learning what current themes are driving the market. To do that, you’re going to need to know where to find market information and how to interpret it.

But getting up to speed takes time, so don’t be in a rush to start trading based on a few days or hours of research. We recommend spending a month following the various currency pairs and familiarizing yourself with what’s going on before you consider yourself up to speed. Using a practice account at an online forex broker is a great way to get up to speed. Over the course of a month, you’ll be exposed to a full cycle of economic data indicators and most market events, like central bank meetings, which will give you a firsthand sense of how the market behaves and adjusts to new information.

Part of the excitement of currency trading is that there’s always something going on — a train is leaving the station every few minutes. So don’t worry about missing the next train, because there’s always another one right behind it.

Taking the pulse of the market

As online currency trading has grown in popularity in recent years, there’s been a proliferation of currency-specific websites targeted at individual traders. We can’t possibly begin to review them all here, but you’d do well to start out with FXstreet.com (www.fxstreet.com), a comprehensive site featuring diverse sources of market analysis, many from big-name institutional contributors, all for free. Twitter is another good source of information, especially around major data releases and breaking news events.

When you’re looking at forex research from various information sources, be mindful of who is providing the analysis. If you don’t know the identities or backgrounds of the analysts, you may be reading the work of someone with just a few months or a year of market experience — not exactly the most sophisticated insight. When in doubt, focus on the reports made available by major financial institutions or market analysts that you trust.

Most online currency trading platforms also offer various types of market research and analysis, so when you’re deciding which broker you should open your account with, look at the quality of its research offerings.

News sources

In the past, we tended to focus on the mainstream financial press, which provide continuous coverage of the major financial markets. Their websites provide frequent intraday updates that cover data releases and announcements, usually with some institutional commentary as well, so you can better understand how and why the market is reacting. In alphabetical order, our favorites are

• Bloomberg (www.bloomberg.com)
• MarketWatch.com (www.marketwatch.com)
• Reuters (www.reuters.com)

That said, it’s always worth following trusted sources on Twitter. Some of the most respected analysts tweet throughout the day, and you can also follow most of the major news outlets to get a quick view of what’s going on. It’s also worth looking at some blogs, which can provide useful information, including Forex Factory (www.forexfactory.com) and Baby Pips (www.babypips.com). As with anything, quantity doesn’t always mean quality when it comes to analysis, so check out a few sources and then narrow them down to the ones that work for you.

When you’re reading a market news report, always use a critical eye. Keep in mind that what’s being reported has already happened, and the market has digested the information and adjusted prices accordingly.

When interpreting news and information, always ask yourself:

• What is the source of the information? You need to differentiate fact from opinion or rumor.
• How old is the information? You need to gauge the timeliness of the information and the extent to which the market has already acted on it.

Real-time market news sources

The forex market moves on news quickly, and the institutional players generally have multiple live feeds from the major accredited newswires, such as Dow Jones, Bloomberg, and Reuters. These days, one of the quickest ways to get real-time news, especially data releases, is from Twitter, which gives you access to hundreds of thousands of news sources and can be an effective way to get real-time market information. We’re prolific tweeters here at FOREX.com, and you can follow us at @forexcom. Everyone on our global research team tweets throughout the day, so you can get 24-hour coverage no matter where you are.

At FOREX.com, we provide a real-time market commentary (known as Forex Insider) directly on our trading platform. The updates are provided by our research team and senior traders based on our years of experience trading in the interbank forex market. Forex Insider offers instant analysis of data releases and other news events, as well as short-term tactical trading considerations such as institutional buying and selling flows, currency option interest, and technical support and resistance levels. We think it’s a great resource for individual traders and about as close as you can get to the institutional market.

Economic data and event calendars

The forex market revolves around economic data and events, and you’re going to need to find a reliable market calendar to see what’s coming down the road next. The best market calendars contain all the major upcoming economic releases, showing the time of the report, what the market is forecasting, and the prior report indicated.

Perhaps even more important than data reports are economic events like central bank rate-setting meetings, the release of the minutes of those meetings, speeches by central bankers, and important meetings such as monthly gatherings of Eurozone finance ministers. Comments from these events frequently move the market in the short term, and if you’re not aware of them, you risk getting blindsided.

Later in this chapter, we look at how markets anticipate data and events, and how this anticipation can affect currency prices. But you can’t anticipate if you don’t know what’s scheduled.

Currency forecasts

Most of the financial media are keen on institutional forecasts of where currency rates are headed, and you’ll likely encounter a lot of one-month, quarterly, and year-ahead currency-rate forecasts in your market research. However, treat these as an indication of overall market sentiment and outlook instead of as a concrete trading recommendation. Most forecasts are heavily skewed to current circumstances and are a much better guide to what the market is thinking at the moment than to where rates will actually be in a month or a year.

Rumors: Where there’s smoke, there’s fire

As if there weren’t enough legitimate news and information to contend with in the 24-hour-a-day forex market, rumors have the nasty habit of popping up at unpredictable times. All financial markets love rumors. Here is a pair of the forex market’s favorites:

• Whisper numbers: These are rumors of economic data anywhere from a few minutes to a few hours before the scheduled release time. They tend to roil short-term positions opened in anticipation of a report, and they also influence the market’s subsequent reaction to the report. For example, a whisper number suggesting a much-worse-than-expected U.S. data report, which was originally forecast to be weak anyway, may see the USD come under more intense pressure prior to the release time. When the real number comes out, and it’s weak but in line with forecasts, and not as weak as the whisper number, the USD may actually rebound because the worst fears were not realized.
• Large market orders: These are rumors that frequently do hold water, but like everything else, not always. They’re typically associated with central banks or large institutional players buying or selling, and they usually mention a price level. Pay attention to the price level as a potential source of support or resistance. If the price level is broken, the order either wasn’t real or has been filled. Either way, the price level has given way, potentially triggering a further directional move.

These days, rumors spread rapidly, and you may have to contend with them multiple times every day, which, over time, can reduce their impact on the market. The trouble with rumors is that you have no easy way to determine whether they’re true, and even if you can, you have no way of being certain of the price reaction, which is ultimately the key to dealing with rumors. Rumors have the uncanny habit of coming out after relatively extensive directional moves or attempts to break through important technical levels, attempts that subsequently fail and see prices reverse direction.

The key is to be aware that an intraday move or test of a technical level is under way and to have a relatively tight exit strategy if the market turns tail. If there is a rumor behind a sudden reversal, you’ll usually find out only after the fact anyway, but a tight exit plan will save you from getting left behind in the reversal.

Putting Market Information into Perspective: Focusing on Themes

At any given moment in the forex market, several themes dominate the market’s attention. Market themes are the essence of the real-world forces currently holding sway in the market. Themes are what market commentators and analysts are talking about when they explain what’s happening in the market. But most important, themes are the filters through which new information and data are absorbed by the market.

Market themes come in all shapes and sizes, and have differing impacts on the market over time. Some are long-term themes that can color the market’s direction for months and years, such as the persistent U.S. trade deficit. Others may hold sway for only a few hours, days, or weeks, such as unexpectedly hawkish comments from a central banker.

Market themes come in two main forms that coexist in parallel universes but that also frequently overlap. The two types of themes that we like to focus on are fundamental themes and technical themes.

Driving fundamental themes

Each currency has its own set of fundamental circumstances in which it’s being evaluated by the market. The basic fundamental environment is ever-present, but it’s also subject to change over time, just as economic conditions will change in the course of business cycles. Fundamental themes will also shift in relative importance to one another, with certain themes being pushed to the side for a period when news or events focus the market’s attention on other, more pressing themes.

As you read the following sections, keep in mind that each theme applies to each and every currency but in varying degrees at any given moment. We include some examples of what’s likely to happen to a currency based on what incoming information means for each theme; we go into more detail on how the market processes fresh data at the end of this chapter.

Rising or falling interest rates

Interest rates are usually the single most important determinant of a currency’s value. (We go into greater detail on the significance of monetary policy and interest rates in Chapter 5.) But it’s not just about where interest rate levels are now, though that’s still important (higher interest-rate currencies tend to do better against lower-yielding currencies). What matters most is their overall direction (whether they’re going up or down), their future level (how high or low they’re likely to go), and the timing of any changes (how fast rates are likely to change).

Markets are constantly speculating about the direction of interest rates, even though interest rate changes are relatively infrequent. For example, as of this writing, the Bank of England hasn’t changed the level of interest rates since 2009. Speculation over the direction and timing of interest rate changes is one of the primary drivers of a currency’s value on a daily basis as well as over longer time frames.

The information inputs that drive the interest rate outlook are centered on economic growth data and inflation reports, which we cover in detail in Chapter 7. The stronger the growth picture is, or the higher inflation pressures are, the more likely interest rates are to move higher, normally improving a currency’s outlook. The weaker the growth outlook or the lower the inflation readings, the more likely interest rates are to remain steady or move lower, typically hurting a currency in the process.

Bond markets also have a lot to say about the direction of interest rates and are the best real-time barometer of the market’s interest rate expectations. Central banks can really only influence short-term interest rates, which are driven by the central bank’s target interest rate. But longer-term bond yields, with the ten-year maturity as the benchmark, reflect the market’s long-term view of an economy’s outlook and the direction of likely future interest rate moves. (Central bankers can really only impact long-term yields by embarking on expensive quantitative easing [QE] programs, which central bankers do not do lightly. This approach only came into vogue in the aftermath of the financial crisis.) Falling long-term bond yields (lower interest rates) point to a weaker economic outlook and the probability of lower interest rates ahead, typically denting that currency, while higher bond yields point to economic optimism and likely higher rates, usually supporting that currency.

The effect of interest rate themes is most powerful when the interest rates of two currencies are seen to be diverging — when one currency’s interest rate is expected to move higher and the other either at the same level or lower. Keep an eye on the three-month yield spreads — the difference between yields of two government bonds — for relative changes that can favor one currency over another. Rates don’t necessarily have to diverge to affect currencies. One currency’s yields may simply move higher faster than another, and the widening spread between the two will reveal this.

When you’re looking at economic data or monetary policy rhetoric, always assess the incoming information first in terms of what it means for the interest rates of the nation’s currency — the interest rate theme. A currency that is expected to see lower rates in the near future, for example, is likely to stop declining and may even rebound if an economic growth report or an inflation reading comes in higher than expected. The market will pause to consider whether its outlook for lower rates is correct. By the same token, a currency facing the prospect of lower interest rates ahead, when hit with weaker economic data or lower inflation readings, is likely to weaken further. We say “weaken further” because it was probably already under pressure and moving lower before the latest batch of data hit the market.

Looking for growth

Economic growth prospects are the linchpin to a host of currency value determinants, from the interest rate outlook to the attractiveness of a nation’s investment climate (stocks and bonds). Not surprisingly, the stronger the outlook for growth, the better a particular currency is likely to perform relative to currencies of countries with weaker growth outlooks. Strong economic growth increases the likelihood of higher interest rates down the road, as central bank officials typically seek to restrain too rapid growth to head off inflationary pressures. Weaker growth data increases the prospect of potentially lower interest rates, as well as dampening the outlook for the investment environment.

Many growth data reports reflect only a particular sector of a nation’s larger economy, such as the manufacturing sector or the housing market. Depending on how significant that sector is to the larger national economy, those reports will tend to be interpreted as correspondingly more or less significant. Industrial production data in Japan, for example, is more significant to the Japanese outlook than it is to the U.S. outlook because of the more prominent role manufacturing plays in Japan.

There’s no set recipe for how growth data will impact a currency’s value, but when the interest rate outlook is generally neutral, as in no solid conviction on the direction of two countries’ rates, the growth theme becomes more important.

Fighting inflation

Inflation is the bogeyman that all central bankers have nightmares about. Even when inflation is low, they still worry about it — it’s just part of the job. When inflation is running too high for their comfort, fuhgeddaboutit. As a currency trader attuned to monetary policy developments, you need to monitor inflation readings as well. (We look at the key inflation reports in greater detail in Chapter 7.)

The inflation theme is far more nuanced than the growth theme in what it implies for a currency’s value. Depending on the bigger picture, it can produce starkly different outcomes for a currency. In general, if growth is good, and inflation is too high, it’s a currency plus. If growth is low or weakening, and inflation is too high, it’s a currency negative. Come again? Both scenarios point to steady-to-higher interest rates, which should typically be a currency plus, right? The rub is that the low-/slow-growth scenario coupled with high/higher interest rates increases the risks of an economy dropping into recession, which would ultimately result in interest rate cuts farther down the road. In this sense, currencies are a bit fickle in that they like higher interest rates some of the time, but not all of the time.

The same phenomenon can happen when a central bank holds rates too high for too long, usually based on fighting inflation, and the market begins to speculate that an economic downturn is ahead. The response is actually not that bizarre if you consider that the forex market is, first and foremost, always anticipating future interest rates.

When factoring inflation data into the interest rate theme, be aware of how the overall growth theme is holding up. If growth is good, and inflation is high because of economic strength, higher inflation readings will be currency supportive. If growth is slowing, and inflation is still too high, the currency impact will be decidedly less positive and very likely downright negative.

Seeking stability

The Great Financial Crisis of 2008–2009 (GFC) along with the Eurozone debt crisis of 2009–2013 exposed financial stability as another overarching theme. In the initial phases of the crisis, the financial sector (banks and insurers) was shaken to its core and required massive government intervention to prevent a system-wide failure. The subsequent economic downturn later exposed excessive government debt levels and budget deficits as a threat to sovereign debt and economic growth. The road to recovery in the developed economies remains a tough haul, and government debt levels and the risk of a sovereign default may continue as a theme for years to come.

Whether it’s high debt levels in Europe or quantitative easing in the United States, financial stability and perceptions of creditworthiness can exert a significant impact on national currencies, usually for the worse. Keep an eye on government bond yields as an indication of market fears. Higher yields may mean investors are selling a country’s bonds over fears of a default and not because of positive growth expectations. If so, the currency of the at-risk country is going to suffer alongside its bonds. (See Chapter 5 for more on this topic.)

Gauging the strength of structural themes

Beyond interest rates, growth, inflation and, stability, several other prominent themes regularly assert themselves, mostly in the structural sphere (the big-picture elements of how an economy is performing).

Structural themes can be fleeting — they can be in full force one day or for several weeks or months and then drop from the radar screen altogether. These themes are also usually secondary to those we outline in the preceding sections (interest rates, growth, inflation, and stability), but structural themes can still exert significant influence on a currency on their own. Most important, they can amplify the impact of the primary themes, like throwing gas on a fire. Following are frequently recurring structural themes:

• Employment: Employment is the key to an economy’s long-run performance and a primary driver of interest rates. As long as employment is rising, the longer-term economic outlook is supported. But if job growth begins to falter, as reflected in incoming labor market reports, economic prospects will tend to be marked down. Sharp increases in unemployment are among the fastest triggers to interest rate cuts by central bankers, going back to the primary interest rate theme.
• Deficits: Both fiscal and trade deficits are typically currency negatives. During times of low/slow growth, the impact of deficits can be magnified, as the very credibility of a currency can be questioned, as was recently the case with the euro. During times of steady/high growth, deficits may have less impact but are still a negative hanging over the outlook.
• Geopolitical issues: It seems like a fact of life now, but geopolitical tensions weren’t always ever-present, as they seem to be today, from North Korean nuclear tests to political upheaval in the Middle East or trade disputes with China. During periods of geopolitical tension, safe-haven currencies like the Japanese yen and the Swiss franc tend to outperform the riskier currencies like the Aussie and Kiwi dollars. The USD is also vulnerable to geopolitical issues, given the size of the U.S. economy and potential military involvement. After geopolitical tensions subside, the market is quick to revert to preexisting themes.
• Political elections or uncertainty: Changes of government and political uncertainty in the major-currency countries can certainly dent the market’s sentiment toward the currency concerned. But shortly after the political situation is resolved, political issues tend to fade quickly into the background.

Analyzing technical themes

Technical themes are perhaps a little harder to grasp than fundamental themes (see the preceding section), especially if you’re not familiar with technical analysis (see Chapter 11). But to make a long story short, sometimes currency prices move simply because currency prices are moving.

The fundamental economic or political themes may not have changed dramatically, but price levels have, and that is frequently enough to bring major market interest out of the woodwork.

In most cases, breaks of major technical or price levels will be in the direction suggested by the prevailing fundamental themes, but the timing is often suspect and can leave traders scratching their heads, asking what just happened. But sizeable price movements have a way of taking on a life of their own, forcing market participants to take action based on price adjustments alone.

In addition, the prevalence of technical analysis as the basis for many trading decisions can add weight to existing fundamental-driven moves, generating yet another theme to propel the move — the technical theme. It may be a trending market movement that attracts trend-following traders who don’t give a hoot about the underlying fundamentals. As long as the technical trend is in place, they keep pushing the market in the direction it’s going, perhaps far beyond what the fundamentals would dictate.

When a currency pair has broken through important technical levels, it’s also going to attract breakout traders — speculators who focus on jumping in on breaks of key price levels, looking to get in on the move for an easy trade. (But nothing is ever quite that easy, and breakout traders can suffer when the breaks are false and the ranges survive.) The additional interest entering the market in the direction of the move again propels the price farther and faster than it may ordinarily go.

Having a sense of where a currency pair stands from a technical perspective is always important, even if you’re not basing your trades on technical analysis.

The technical-theme phenomenon also stems from several real-life considerations that all relate back to the relative level of currency prices.

• Option interest: The currency options market is massive and is one of the reasons that the spot currency market is as large as it is. Option-related hedging is one of the biggest sources of spot market activity outside short-term spot speculation. When spot prices have been trading in well-worn territory (a relatively narrow price range, for example), option interest tends to accumulate around the recent range. If the ranges are broken, sizeable option-related interest is frequently forced to come into the market and trade in the direction of the price breakout, either to unwind hedges or to cover new exposures created by the price break, and usually some combination of both. The amounts can be staggering, propelling the directional move in an extreme way.
• Systematic models: We look at so-called black box or algorithmic trading in Chapter 3. Algorithmic trading has dramatically increased in scale in recent years, with some estimates suggesting 30 to 35 percent of daily volume is from algorithmic systems. In many cases, systematic models trading decisions are generated based solely on price movements. They may be short a currency pair until a certain price level on the upside is traded, for example, which triggers a signal to exit the short and go long, no questions asked.
• Hedgers: Large-scale hedgers may be forced to come into the market if a rapid and unexpected price movement develops. Many firms identify an internal hedging rate for corporate and financial management purposes. As long as they’re able to sell above or buy below that rate, they’re looking good. If the market moves sharply on them, they may be forced to jump in on the direction of the move for fear of not ever seeing the internal hedging rate again.

Reality Check: Expectations versus Actual

When it comes to reacting to data reports and market events, the forex market typically displays two responses. The first reaction is a short-term price response to the data report or news itself, which is where most of the intraday fireworks in the forex market go off. The second reaction, usually more important in the bigger picture, comes in later trading, when the underlying themes (outlined earlier in this chapter) are updated to reflect the latest piece of news or data.

In one case, the data or news may be in line with the dominant themes of the moment, and the initial directional price reaction may be extended even further in subsequent trading action. The market may be anticipating lower U.S. interest rates, for example, and a weak U.S. consumer confidence report is released, sending the USD initially lower against other currencies. Because the weaker confidence reading supports the theme that the U.S. economy may be weakening, additional selling interest may materialize and lead to further price declines in the USD.

In other cases, the data report may fly in the face of the prevailing market themes, leading to an initial reaction in the opposite direction of the recent theme. The market may be trading on the theme that Eurozone interest rates are going higher and that the Eurozone economic outlook is improving. A subsequent Eurozone retail sales report may come in on the weak side, potentially leading to an initial market reaction that sees the euro weaken. Whether the euro’s move lower will be sustained depends largely on what the market decides the latest retail sales report means in terms of the larger theme of stronger European growth and higher Eurozone interest rates.

The data report may have been influenced by bad weather keeping shoppers at home, for example, and may be interpreted as just a bump in the road on the way to higher Eurozone interest rates. In such a case, initial euro weakness may be short lived and eventually reverse course higher. On the other hand, the weak retail sales report may cause the market to reconsider that higher European Central Bank (ECB) rates are a sure thing and keep on selling euros.

Of course, there’s never a set recipe for how data and news are ultimately going to be acted on by the market. The potential data and event outcomes and subsequent market reactions are myriad, to say the least. That’s one reason the market reaction to the data is always more important than the data itself.

But as currency traders, we still have to understand what the data means to make sense of what the subsequent market response suggests for the bigger picture. The starting point is to understand the initial market response to the data/news in terms of what the market was expecting and what it actually got. We need a baseline from which to interpret subsequent price movements.

The role of consensus expectations

Data reports and news events don’t happen in a vacuum. Forex markets evaluate incoming data reports relative to market forecasts, commonly referred to as consensus expectations or simply the consensus. Consensus expectations are the average of economic forecasts made by economists from the leading financial institutions, and private firms or academia. News agencies like Bloomberg and Reuters survey economists for their estimates of upcoming data and collate the results. The resulting average forecast is what appears on market calendars, indicating what is expected for any given data report.

The consensus becomes the baseline against which incoming data will be evaluated by the market. In the case of economic data, the market will compare the actual result — the economic figure that’s actually reported — with what was expected (the consensus). The actual data is typically interpreted by the market in the following terms:

• As expected or in line with expectations: The actual data report was at or very close to the consensus forecast.
• Better than expected: The report was generally stronger than the consensus forecast. For inflation reports, a better-than-expected reading means inflation was lower than expected, or more benign.
• Worse than expected: The data is weaker than the consensus forecast. For inflation reports, a worse-than-expected reading means inflation was higher than forecast, or more inflationary.

Additionally, the degree to which a data report is better or worse than expected is important. The farther off the mark the data report is, the greater the likelihood and degree of a subsequent price shift following the data release.

When evaluating central bank statements and comments from monetary policymakers, the market evaluates the language used in terms of hawkish (leaning toward raising interest rates) and dovish (leaning toward steady to lower interest rates). (We look at interpreting central bank rhetoric in greater detail in Chapter 5.)

Pricing in and pricing out forecasts

But financial markets don’t typically wait for news to actually be released before they start trading on it, and the currency market is no different. Currency traders begin to price consensus expectations into the market anywhere from several days to several hours before a report is scheduled. Pricing in is the practice of trading as though the data were already released and, usually, as though it has come out as expected. The more significant the report, the sooner markets are likely to start pricing in expectations.

Unfortunately, there’s no clear way to always tell whether or how much the market has priced in consensus expectations, so you need to follow market commentaries and price action in the hours and days before a scheduled report to get a sense of how much the market has priced in any forecast. And it’s not always a case of the market pricing in an as-expected result. Market sentiment may have soured (or improved) in the run-up to the release, leading the market to price in a worse-than-expected (or better-than-expected) report. Stay on top of the market reports to get a handle on the mood.

Consensus estimates can also sometimes change in the days leading up to the report, based on other interim reports. For example, Institute for Supply Management (ISM) manufacturing forecasts may be downgraded (or upgraded) if the regional Chicago purchasing managers’ index, which comes out a few days before the ISM index, is weaker (or stronger) than expected. This can lead to pricing out of consensus expectations, depending to what degree the consensus was priced in.

When good expectations go bad

Data miss is the market euphemism for when a data report comes in outside expectations. If the consensus was for an improvement in a particular indicator, and the actual report is worse than expected or disappointing, the result may be a sharp reversal in price direction. If core U.S. durable goods orders are expected to rise, for example, but they end up falling, we may be looking at a sharp drop in the USD. If the USD has gained prior to the release on the basis of pricing in the positive consensus, those who went long are going to be dumping their positions alongside traders selling the USD on the weak result. The same thing can happen in reverse if negative expectations are met by a surprisingly positive data report.

With as-expected data reports, it’s frequently a case of “buy the rumor, sell the fact” (meaning, traders have already priced in a strong report, and if it meets expectations and sometimes even exceeds them, traders who bought in advance will be looking to take profit and sell on any subsequent gains). This market phenomenon can also happen in the other direction — as in “sell the rumor, buy the fact” — depending on the currency pair involved and the nature of the consensus forecast.

Anticipating alternative outcome scenarios

We’ve found that it frequently helps to think through the likely reactions to major data releases to prepare for how the market may react in the very likely case that the data surprises one way or the other. It’s a thoroughly academic exercise, and it won’t cost you anything, but it may just give you a significant leg up on the rest of the market, if you’re inclined to trade around data reports. Considering various “what if” scenarios helps us focus our attention and our trading strategies on the major themes currently operative.

For example, if the market is expecting an increase in the upcoming U.S. ISM manufacturing index, we like to ask ourselves what’s the likely reaction if the ISM disappoints those expectations, and also what happens if it surprises to the upside and is even stronger. This makes us focus on the most recent price action, and perhaps we note that the USD has declined slightly in advance of the report based on better Eurozone data overnight.

If the ISM comes in below expectations, we’re now thinking about how many pips lower the USD is likely to fall. We pinpoint key support levels and use those as our benchmarks to gauge the subsequent market reaction. If the report should surprise to the upside, we’ve also identified key resistance levels above that may come into play and where the next resistance levels are after them.

When the data does come out, we have a fairly rational baseline to judge the subsequent market reaction. If ISM rises as expected, we’ve identified which USD resistance levels may be tested. If they’re not being tested, we’re starting to think that maybe the market is more intent on buying EUR than buying the greenback, and it may not be wise to fight the near-term trend. If the ISM surprises on the weak side, we’ve also identified downside USD support levels (EUR/USD resistance levels), breaks of which may see further USD weakness/EUR strength.

Think ahead about what the market is expecting based on consensus expectations and how much has been priced in. Be prepared to factor various data outcomes in the larger themes you’ve already identified. Think through how the market is likely to react based on those scenarios, and you’re likely to be several steps ahead of the crowd. (See the “Anticipating and trading on market reactions” sidebar for a real-world look at how we prepare for market reactions to data and events.)