This may seem obvious, but YOU HAVE TO ALWAYS BE ON GUARD FOR A SURPRISE. Anyone who has traded the forex market or any other global market over the past month should not need a reminder but I will give one anyway. Let me explain why.
All markets try to price in the future, whether it be expectations of future monetary policy, the forecast of an economic report (i.e. consensus), what a monetary or finance official might say, the result of an election, etc. Some position ahead of key events, some look to bet on the expected outcome, some hedge existing positions against an expected risk and some just go with the flow. Whatever the reason, markets bake in expectations into the price of an asset 9e.g. currency) and anything that changes that expectation or the actual result comes in different can come from a surprise.
The Element of Surprise
We saw it today with the EUR trading weaker, both vs the dollar and on its crosses, ahead of ECB President Lagarde’s press conference that followed the decision, as expected, to keep rates unchanged
The Surprise
The initial reaction was to sell based on revised economic forecasts showing weaker inflation that raised expectations that the ECB might start cutting rates sooner than what had been priced in.
Now, here comes the surprise. LaGarde poured cold water on those expectations by pushing back on an early rate cut hope and this sent those trading short EURUSD (and EUR crosses) scrambling. I will let this chart do the talking as to what came next.
This is just a reminder to expect the unexpected and look for what would be a surprise. This is what moves markets and this is what occurred today.
So, don’t trade with your head in the stand. Don’t just look at your upside but at your downside risk as well. If you don’t like the risk, step aside. If you are okay with the risk, look ahead to what would produce a surprise. This is just a trader like you giving some advice, not just from common sense but from experience.
Jay Meisler, co-founder, global-view.com
jay@global-view.com
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