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Predicting the news is one thing….predicting the market reaction is another.
By Tom Long | February 7, 2008
Today we got word that the European Central Bank kept their interest rates unchanged while the Bank of England lowered their interest rates. Since higher interest rates usually lead to a higher currency value while lower interest rates usually lead to a lower currency value, FX Power Course students have been asking us why the EUR/GBP sold off when it should have rallied. The first thing I tell them is that predicting the Central Bank actions are one thing, but predicting the market’s reaction is another. The rate cut by the Bank of England was no surprise, traders were expecting this. Also, the lack of change by the European Central Bank was not necessarily a surprise. However, the accompanying statement did show that the European Central Bank was concerned that their economy might be slowing down. This was a little different from the stance up until this announcement in that previously their bias was to raise rates to keep inflation in check. So traders, who typically trade today based on what they think the situation will be like six months in the future heard what they have been suspecting, that the next move by the European Central Bank might be to lower rates instead of raising them. So traders sold the EUR pairs. So if you like trading the news, stick to the reaction of the market and not the news itself when making trading decisions.
noneTopics: Don't Trade Like This |