Market Expectations of News and Their Impact on Currencies

There’s no one “All in” or “Bet the Farm” formula for success when it comes to predicting how the market will react to data reports or market events or even why it reacts the way it does.

You can draw on the fact that there’s usually an initial response, which is usually short-lived, but full of action.

Later on, comes the second reaction, where forex traders have had some time to reflect on the implications of the news or report on the current market.

It’s at this point when the market decides if the news release went along with or against the existing expectation and if it reacted accordingly.

Was the outcome of the report expected or not? And what does the initial response of the market tell us about the bigger picture?

Answering those questions gives us a place to start interpreting the ensuing price action.

Consensus Market Expectations

A consensus expectation, or just consensus, is the relative agreement on upcoming economic or news forecasts.

Economic forecasts are made by various leading economists from banks, financial institutions, and other securities-related entities.

Your favorite news personality gets into the mix by surveying her in-house economist and collection of financially sound “players” in the market.

All the forecasts get pooled together and averaged out, and it’s these averages that appear on charts and calendars designating the level of expectation for that report or event.

The consensus becomes ground zero; the incoming, or actual data is compared against this baseline number.

Incoming data normally gets identified in the following manner:

• “As expected” – the reported data was close to or at the consensus forecast.
• “Better-than-expected”– the reported data was better than the consensus forecast.
• “Worse-than-expected” – the reported data was worse than the consensus forecast.

Whether or not incoming data meets consensus is an important evaluation for determining price action.

Just as important is the determination of how much better or worse the actual data is than the consensus forecast.

Larger degrees of inaccuracy increase the chance and extent to which the price may change once the report is out.

However, let’s remember that forex traders are smart, and can be ahead of the curve. Well the good ones, anyway.

What’s priced in?

Many forex traders have already “priced in” consensus expectations into their trading and into the market well before the report is scheduled, let alone released.

As the name implies, “priced in” refers to traders having a view on the outcome of an event and placing bets on it before the news comes out.

The more likely a report is to shift the price, the sooner traders will price in consensus expectations. How can you tell if this is the case with the current market?

Well, that’s a tough one.

You can’t always tell, so you have to take it upon yourself to stay on top of what the market commentary is saying and what price action is doing before a report gets released.

This will give you an idea of how much the market has priced in.

A lot can happen before a report is released, so keep your eyes and ears peeled.

Market sentiment can improve or get worse just before a release, so be aware that price can react with or against the trend.

There is always the possibility that a data report totally misses expectations, so don’t bet the farm away on the expectations of others. When the miss occurs, you’ll be sure to see price movement occur.

Help yourself out for such an event by anticipating it (and other possible outcomes) to happen.

Play the “What if…” game.

Ask yourself, “What if A happens? What if B happens?

How will traders react or change their bets?”

You could even be more specific.

What if the report comes in under expectation by half a percent? How many pips down will the price move? What would need to happen with this report that could cause a 40 pip drop? Anything?

Come up with your different scenarios and be prepared to react to the market’s reaction. Being proactive in this manner will keep you ahead of the game.

What the heck?! They revised the data?!! Now what?!!!

Too many questions… in that title.

But that’s right, economic data can and will get revised.

That’s just how economic reports roll!

Let’s take the monthly Non-Farm Payroll (NFP) as an example.

As stated, this report comes out monthly, and usually included with it are revisions of the previous month’s numbers.

We’ll assume that the U.S. economy is in a slump and January’s NFP figure decreases by 50,000, which is the number of jobs lost. It’s now February, and NFP is expected to decrease by another 35,000.

But the incoming NFP actually decreases by only 12,000, which is totally unexpected.

Also, January’s revised data, which appears in the February report, was revised upwards to show only a 20,000 decrease.

As a trader, you have to be aware of situations like this when data is revised.

Not having known that January data was revised, you might have a negative reaction to an additional 12,000 jobs lost in February.

That’s still two months of decreases in employment, which ain’t good.

However, taking into account the upwardly revised NFP figure for January and the better-than-expected February NFP reading, the market might see the start of a turning point.

The state of employment now looks totally different when you look at incoming data AND last month’s revised data.

Be sure not only to determine if revised data exists but also the scale of the revision. Bigger revisions carry more weight when analyzing the current data releases.

Revisions can help to confirm a possible trend change or no change at all, so be aware of what’s been released.