Broker to Trading

The US Federal Open Market Committee (FOMC) Federal Funds target rate decisions and the monthly Non-Farm Payrolls (NFP) figure release are two of the big ones for dollar crosses, particularly EUR/USD and USD/JPY. These releases will tend also to affect other pairs and assets, for example gold. Brexit was a one off news event, consequent on the expectation and then actuality of the EU Referendum vote in the United Kingdom, although longer term market effects could be expected as well.

• FOMC and NFP can both move markets, but FOMC is a decision affecting interest rates and Non-Farm Payrolls is a figure about employment. So FOMC can be a change in the target rate, no change and also a statement (and a press conference). The statement itself can significantly affect the markets as it is digested, as it can suggest future changes in the Fed Funds target rate. This can be seen in a relatively more drawn out news events, such as Brexit; the market could be seen pricing in expectation then reacting to a gathering change of expectation as the polling count continued.

• Non-Farm Payrolls can signify possible changes in economic activity which may also affect the FOMC decision. But the key part of NFP is the actual figure itself and whether it is close to the expected figure. This can move markets, or not move markets, especially if the figure is as expected and has been priced in.

  There is a further potentially market moving factor for NFP, and that is whether the figure is good or bad news for the economy. So a strong surprise would be a figure which is significantly different from the expected figure such that it is opposite in terms of its expected signals about the state of the economy.

  NFP may tend to need a significant surprise to get a reaction which stays up or down relative to its start price or even continues in this direction. This means the jobs figure needs to be significantly contrary to expectations, and expectations are founded on data already known. But it does happen as the data they are founded on is different from Non-Farm Payrolls data. Figures that differ from expectations but are not a total surprise may oscillate or even not do much.

• For FOMC, unexpected outcomes can produce strong directional outcomes, but expected outcomes can also produce such reactions. This is because the actuality of the decision being made even if expected can have additional market moving effects, or can perturb the market. But the difference perhaps isn't that great since expected FOMC outcomes can also produce relatively calm outcomes and it is possible to conceive of a situation where a jobs number is expected but also has an effect on the market by its wider consequences, when it it revealed to be the case.

In the case of Brexit, the market was reacting to a news event. It was a surprise news event writ large. What the actual consequences will be, is another matter.

The market has a capacity to produce an unexpected outcome, whether the data is expected or not expected. This would seem probable, as the news data is being introduced into a market with a vast array of influences. Nonetheless major news events can, even if only for a short time, result in significant value changes quickly and also break through value levels which had been providing support or resistance, resulting in longer term changes.

In the two repeated news event, FOMC and NFP, there is some knowledge of what the effects of these news events may be, which can act as a break on market reactions. But Brexit did not have this kind of expectation from repetition and hence perhaps, strong reaction were seen. But both FOMC and NFP can stray into this kind of territory from time to time.

Moves which are strongly directional can rapidly reverse perhaps after a brief pause around support or resistance, even coming back to the start point. But these moves can also continue after the pause. There may though not even be a reaction, or much of one. The market may also not react as expected to repeated variations on market moving news.

For FOMC, what the market initially reacts to may be a hint in the text of the statement indicating future changed in interest rate policy, or some keywords the market was looking out. This reaction may not continue, resulting in an oscillation, for a variety of reasons including that the statement has an rapidly emerging interpretation which changes the markets initial sense of it.

Potentially FOMC has a significant market moving potential, if there is surprise change in the federal funds target rate. But this could result in a move perhaps counter to the expected move, of significant and extremely rapid proportions.

In the example of Brexit, looking at GBP/USD and EUR/USD, the price of these pairs can be seen diving hard on the 1hr chart from 11pm BST, which is around when it started to become apparent that the results were not as expected. This resulted in a move that found a bottom around 4am or 5am BST and then retraced. Strong directional moves may bounce at least to some extent, but where they bounce is the question, as is how far they will retrace from that bounce.

The time before the release can have trading potential. It can generate pricing-in trends and as the time approaches, moves given momentum by volatility. This means though they are prone to reversing. The market can get calm close to release, unless the outcome is expected, but still of a market moving nature, with volatility then suddenly picking up very close to release.

During is trading into the news. Issues can include wide ranging oscillations, widening spreads and when to take a position (the time before can have volatile swings, the time of release may be too late and may trap the trader in a move).

After the release can result in trends which pick up the direction wrapped in volatile moves, before and during release, or reverse, but in a less volatile manner than an initial oscillation in the first minute or so.

One thing which may (or may not) happen, is a reprise of the whole thing in the next trading session or sessions. Not the initial volatile movement, but the directional move, perhaps with volatility as market open approaches.

One way of looking at oscillations in news trading is that the release can be seen increasing the tendency of the pair to move the way it moves, but in wider swings and in faster time. This way it moves in general can be seen as bouncing off support and resistance, or going through it, or waving back and forth around it.

In a news event all three events can be seen happening, but because the intensity is increased it tends to look more like a move to support or resistance, having cut through others before quickly, then bouncing back to another support or resistance, having cut through those before. This is at release. After release slower versions of these moves can be seen, but with more waving and horizontal moves as the market normalises. Before release, the market will tend to be more volatile, but with moves which can still happen fasts within this.