When does News Trading go wrong?
When news releases are put out, traders base their trading on those news releases. It can lead to strength or weakness in a currency depending on the news and what it corresponds to. However the expectation of currency changes that a news release gives does not always play out as expected, and for traders who choose to trade on news this can be problematic. There are two main factors that may confuse news traders.
US indicators can produce the opposite result of the dollar, due to the risk on risk off mentality, so a weaker than expected US indicator can lead to a strong US dollar. That is because the US dollar affects the whole world, and it’s better to be safe by using the US dollar. When indicators surpass expectations, the whole world’s currencies are expected to improve so no safety is needed and the dollar is sold. This behavior has taken place for long periods of time in the aftermath of the financial crisis. In that case, never ending expectations caused the currency to return to normal behavior followed by weak data. Creating more dollars to buy bonds weakens the US dollar, and positive figures lower chances of raising the US dollar.
The second expectation that traders have on big events such as rate decisions, where high expectations don’t come true and lead to disappointment. Or high expectations do come true but they were priced in or over priced in that any result leads to sell off. This scenario is called “Buy the rumor, sell the fact” it can even happen when the event is not a rumor but a well know scheduled and debated event.
For example, a future rate cut in Australia may result in a rally for the Australian dollar if this even would be priced in. This can happen despite the usual behavior of a rate cut hurting the perspective currency and despite reality meeting expectations.