Every financial market is subject to the extreme price fluctuations that result from the announcements of major economic indicators, or unexpectant news. Macro-level economic indicators such as consumer price index (CPI), Gross Domestic Product (GDP), and unemployment numbers are just a few of the indicators that have a broad impact on all financial markets. Very often however, it’s not the announcement of the actual economic indicator data that moves the markets, it’s whether the number announced met market expectations that has a sharp impact. Macro-level economic indicators are announced on a periodic timetable. As the scheduled date for the announcements approach, financial and economic analysts set expectations for the indicator to be announced. As such, the market slowly adjusts to the expectation as the announcement date nears. On the day of the announcement, market expectations are already “baked in” to market prices. If the economic indicator that is announced meets market expectations, then there is very little effect, and the market resumes on its current trajectory. If however, the number announced is significantly above or below expectations, a move in the market across the board will usually take place.  

Market Reaction

When it comes to news or announcements that move markets, it’s important to remember that it’s not the substance of the news that matters, it’s how the market reacts that matters. No two situations ever have the same circumstances or outcomes. The one thing that is constant is that the market reaction will always filter down to the price data. The first thing that happens is the price spreads widen significantly across all affected markets. A sharp spike will show itself in the price charts. As the initial sharp price move takes place, stops and limit orders that are on the order-books are executed, and traders that are on the wrong side of the price move cut their losses. Once the abrupt imbalance in supply and demand stabilizes, the price will retrace a bit, and will then usually resume in the same direction of the initial spike. As the news is disseminated, traders that missed the initial move now attempt to position themselves for the long-term effect. The chart below shows an example of a market move based on the reaction to an announcement that England was exiting the European Union.

Daily Chart: British Pound / US Dollar (GBPUSD)

The above price chart shows an initial downward spike resulting from the Brexit Referendum announcement. The announcement affected all markets. The market stabilized in a range before continuing a downward move before reversing a couple of months later. It’s very difficult to attempt to predict which way price will move after a macro-level economic indicator or news is announced. There are general rules as to how certain macro-level economic indicators affect markets, however, it’s the unique market expectations that change with every situation. Gauging the initial price spike gives an indication of how the overall market will react.

Unexpected News

Quit often there are situations that arise when unscheduled announcements or news takes place that has a significant impact on financial markets. For example, when a world leader makes an important announcement that may have an impact on his or her own country, or other countries. When the President of the United States unexpectedly announces major changes in foreign or domestic policies that impact the U.S. Economy, markets around the world usually react. The same holds true for unexpected catastrophic events such as hurricanes, or the terrorist attacks of September 11, 2001. Events such as these have an immediate short-term effect on all markets around the world and follow through with a long-term effect as well. The price behavior mentioned above usually applies, there is an initial spike, then a slight retrace, then price resumes in the direction of the initial spike until the market stabilizes.