At first glance, it may seem that technical analysis is more universal than fundamental. Indeed, with the help of studies of monthly and weekly time frames, it is possible to predict the dynamics of currency pairs for the long term, weekly and daily – for the medium term, intraday – for the short term. The purpose of studying macroeconomic statistics is to identify future asset prices in the medium and long term investment horizon. In fact, the foundation can be used to build short-term trades. It’s about trading on the news.
As a rule, after analyzing the economic, political and other factors of changes in currency quotes, the investor forms an asset portfolio, which is periodically reviewed. Once a week and/or before the release of important macro statistics. Thus, important indicators or meetings of central banks are the basis for reviewing the structure of portfolios of large players, which leads to a violent market reaction.
When trading on the news, the behavior of the asset in anticipation of an important event is of fundamental importance. If the forecast is negative, the currency may fall, however, after the market has received what it wanted, a large-scale closure of shorts will go. As a result, in response to bad news, the asset will suddenly shoot up due to the implementation of the principle of “ sell by rumor, buy by the fact ”. A typical example is the reaction of AUD / USD to the July RBA meeting. In anticipation of the Australian dollar was actively selling, as investors expected a drop in cash rate from 1.25% to 1%. The reserve bank really weakened its monetary policy, after which the closing of short positions began, and the pair switched from falling to growth.
Neutral forecasts for macroeconomic indicators or uncertainty in the views of the central bank most often lead to asset consolidation on the eve of an important event. None of the major players want to climb forward Old Man in the heat. As a result, the currency pair begins to draw a narrow trading range on the charts for several days. This was the case with the June US Employment Report. In May, nonfarm payrolls disappointed, and investors wondered if this was a market noise or if it was a trend of a slowdown. The pair EUR / USD consolidated over the entire week in the range of 1.127-1.131. Strong data allowed the bears to withdraw their quotes to the base of the 12th figure.
Further, another mystery arose for investors: how will the Fed react to impressive non-farm payrolls? Will the central bank change its mind about cutting rates? The market was waiting for Jerome Powell to speak before the US Congress, and the EUR / USD pair returned to consolidation in the range of 1.1195-1.123. The “pigeon” rhetoric of the chairman of the Federal Reserve helped the “bulls” conduct an attack.
In the theory of fundamental analysis, the news is divided into expected (they are usually reflected in the economic calendar) and unexpected. If the market receives positive statistics from the background of a negative surprise, then the price of an asset, as a rule, drops. Something similar happened in the GBP / USD pair: Britain’s labor market data were better than expected, but the news of the increased risks of promiscuous Brexit drowned the British pound.
Thus, the initial situations for trading on the news are different, and in our subsequent materials, we will talk about how to use each of them.