There is no one-size-fits-all formula for predicting the market’s possible response to economic data, and there is no standard answer to why the market responds in this way.
You will usually see that the market will make an initial response after the data is published. This response will usually be short-lived, but volatile.
Subsequently, there will be a second wave of reaction, at this time, market traders have been digesting data or news reports for some time.
It is at this time that the market will decide whether the published news or data is as expected or contrary to expectations, and whether it should respond accordingly.
Are the reported results in line with expectations or inconsistent? Also, what is the signal from the market’s initial response to the overall economic message?
The answers to these questions help us to interpret the price trend.
The common expectation is the general view of the market on the upcoming economic data or events. Before the data is released, many economists from banks and financial institutions will make predictions on the data.
The media averaged the prediction levels of many market participants, including economists, and ultimately formed the expected value that we saw before the report or event was announced.
After the expected value is formed, market participants have a reference standard for the data to be announced. They will see whether the final data released meets expectations, exceeds expectations, or falls short of expectations.
⊙ In line with expectations, that is, the final data is very close to or consistent with expectations
⊙ Better than expected, that is, the final result of the report is better than market expectations
⊙ worse than expected, that is, the final result of the report is worse than previously expected
Whether the upcoming data is consistent with expectations is very valuable for foreign exchange traders, because it will determine the short-term direction of the exchange rate. The greater the gap between the final data and the expected level, the greater the possibility that the exchange rate will fluctuate greatly after the report is released.
However, we need to remember that foreign exchange traders are very savvy people, and they tend to be well laid out in advance.
Some foreign exchange traders will digest the market’s expected data results in advance, and they will conduct corresponding market operations before the report is released.
The greater the likelihood that data reports will affect price movements, the faster traders will digest market expectations. How can you say that the current market situation is like this?
It’s really hard to say.
You also know that it is difficult to say, so before the data report is released, you need to look at the current price trend at a higher level than the market generally expects. This will make you think about how much the market digests data.
Before the results of the report are finally announced, there will be many uncertainties, so your eyes and ears must be highly vigilant. Before the report is released, market confidence will rapidly improve or deteriorate. Therefore, you must be alert to the inconsistency between the exchange rate and the current trend.
The results of the final published report are completely inconsistent with expectations, so do not completely put the bet on the side that is consistent with the expectations of most people. When the reported data results are clearly inconsistent with expectations, you will see that the price may be in the opposite direction of the majority of people’s previous judgments.
What you need to do is ask yourself, “What will happen to the exchange rate in case A? What will happen to the exchange rate in case B? Other traders will react, will they change their previous judgment?”
You can also do more detailed work.
You can ask yourself, “What will happen if the data result is lower than the expected 25% exchange rate? How many points will the price drop? Cause the exchange rate to fall by 40 points, what should the reported result be?”
You don’t have to ask yourself this. What we have to say is that before the report is released, you need to take into account the possible results and prepare for all the possible results in the market. Taking a defensive posture before the results are announced will keep you in a good position.
Follow the revised data
We need to note that economic data will be revised. This is also the process of publishing the official economic report.
Let us take the monthly non-agricultural employment data (NFP) in the United States as an example. As the name of the indicator states, the report is published once a month, and the revised data for the previous month is also included in the many sub-indices announced.
We assume that the US economy is declining, and the number of non-farm payrolls in January fell by 50,000. The non-farm payrolls data for February will be released soon. The market generally expects that it will fall by 35,000 again in February.
However, the data released in February showed that the number of non-agricultural employment fell by only 12,000, which is much better than expected. At the same time, the January data was also revised. The revised data appeared in the February non-agricultural report, and the final revision was only a reduction of 20,000.
As a foreign exchange trader, you must be vigilant about data corrections.
If you do not take into account the January revised data, you may take negative action due to a further increase of 12,000 non-farm payrolls in February.
However, taking into account the fact that the January data was revised upwards and the February data was better than expected, this may be the turning point in the market confidence recovery.
When you see the final data and the revised data in January, your view of the US job market may be very different from the previous pessimistic view. Although the number of employees is still declining, the rate of decline has been shrinking, and this is exactly how the job market has stabilized.
We not only need to judge whether the data will be revised, but also need to be vigilant about the size of the revised data. When we analyze the current data, the greater the correction, the greater the weight of its impact on the exchange rate trend.
The revised data can help us determine the possible changes in the trend, or the current trend will not change, so for the published data, we must maintain a high degree of attention.