Which news events actually move the markets and how can we use them to good effect?

Jan 9 • Between the lines • 2801 Views • Comments Off on Which news events actually move the markets and how can we use them to good effect?

Each trading day, in our various articles and blog entries, we discuss the medium-high impact news events and any fundamental policy decisions that may move the market. Once traders are past the apprentice stage they’ll quickly realise that it is in fact fundamental issues and news events that move the market ahead of any ‘lines in the sand’ we may have drawn on our charts. We’re not suggesting that price doesn’t react to simple moving averages such as the 200 SMA, or to pivots, resistance and support, or key psyche lines and handles, such as the DJIA reaching 16,500, but it’s generally fundamental policy issues and high impact news events that really drive the FX market in particular, especially given FX’s high sensitivity to domestic and global events.

With that claim in mind we thought that we’d take a walk through the various high impact news events for the remainder of this week in order to point out when and where price might turn. But before we do we’d like our readers to pull up a daily chart of the DJIA index. For clarity it would be easier if we looked at a naked chart and perhaps converted the normal candlesticks to Heikin Ashi.

Once done we can clearly see where and when price turned and we can then quickly establish why. Price violently swung to the upside on December 18th as the USA Fed announced that they were tapering pre Xmas, which came as a surprise to market analysts and investors. In the two days’ preceding candles (in the build up to the decision) we can clearly see that the momentum to the downside was beginning to tire, it was if the market was anticipating an event, which it was.

Now we’re concentrating on this single movement as it clearly illustrates, in as clean a fashion that we can reference recently, price moving due to a high impact news event twinned with a major fundamental policy decision. In short, as ‘pictorial’ evidence on the daily time frame/chart it doesn’t get much better than that. We also need to bear in mind that price trades in a range for approx. 70% and trends for approx. 30% of the time, therefore we’re looking for the possible accelerated turning points through the mist and it’s hardly needle in a haystack given how obvious it is, with or without a rear-view mirror.

So let’s move on and look at the remainder of this week’s major high impact news events and possible policy decisions to see if we can spot any particular and potential swing points and change in trend direction. Or events that may accelerate the current swing trend we’re in. We’ll also isolate the securities that may be affected, such as sterling, yen, euro and major indices such as the DJIA or Nikkei.

Thursday’s high impact news events and fundamental policy decisions

In the UK we have the base interest rate decision from the UK’s BoE MPC and the decision relating to the bank’s quantitative easing programme. The current rate is 0.5% and the current level of monetary easing is £375 bn and neither the base rate, or the level of QE is expected to change. However, if the BoE, led by the new governor Mark Carney, were to suddenly announce a change in policy this morning then we would likely see some action on sterling. For example, a rise in the base rate to 1%, which the BoE has threatened to do once unemployment reaches 7%, would cause a rapid rise in sterling versus its major peers. Similarly, if and when unemployment in the UK reaches 7%, possibly in the second quarter of 2014, then analysts and institutional traders would begin to very quickly put 2 and 2 together and think a rate rise is imminent.

Looking at other news for today, the ECB lowered its base interest rate, referred to as the minimum bid rate, to 0.25% in November 2013. This immediately caused a selloff in the euro versus its major counter parts. If the ECB were to lower today, or increase, then we’d likely see a major movement with the euro.

The other major news release of the day is the USA weekly unemployment claims; the prediction is for a print of circa 337K for the week, however, if this figure disappoints, with the print coming in at 380K, or positively surprises the market by coming in below 300K, then the value of the dollar would be affected. An extremely poor print, let’s say 400K, might cause the DJIA to rise as investors would immediately anticipate that any future taper is off the table and that the dissenter in the FOMC, Eric Rosengren who disagreed with the vote to taper, calling the decision “premature, was in fact correct.

On Friday we get the single biggest release that appears to get new traders in particular extremely excited, the NFP release. But before that release we get an interesting release concerning Europe as a German court of lawmakers’ rules on the legality of the OMT programme that the ECB created to inject liquidity into the banking system, which many analysts regard as QE via the back door and a method to legally circumnavigate the European Union constitution and ‘rules’. If this court vote rules versus OMT then we could see sparks fly in relation to the value of the euro.

Anyhow, back to NFP day, the anticipation is for a print of 194K extra jobs created over the past month. But as always this print has the ability to surprise. If the data is much better than predicted, perhaps as high as 250K, then we could see the DJIA rise and take the dollar with it. However, analysts could take the view that the improved data brings a tighter taper closer and correspondingly the market could sell off slightly.

In conclusion we’ve highlighted a few key high impact news events that could impact on the market over the next two days. We can’t predict if they’ll impact the market and if they do what direction, but hopefully we’ve heightened our clients’ awareness of news events and how they can be used to good effect when trading the markets.