The following is a guest post from Jay Meisler founder of Global Traders Association (GTA), an organization designed to advocate for the global trader.
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Maybe it is my yearning for the good old days when humans were the market makers but I continue to scratch my head at the reaction to news and key events. It may be as simple as news algos reacting to keywords or just an opportunity to run stops (see why Stops Are the Strongest Force in the Forex Universe). For me it is a matter of a market that is dumb and getting dumber.
Take the reaction to the Bank of England decision on September 10. It came out exactly as expected with the vote of 8-1 in favor of keeping policy unchanged, the same as the prior meeting. The accompanying minutes contained no surprises yet GBPUSD spiked higher as the 5 minute chart below shows.
The move from 1.5373 – 1.5449 made no sense but I have learned a long time ago not to stand in front of these type of reactions until the dust settles. When I started out as a bank trader, we used to stand our ground and battle the market when there was what we considered an illogical or over reaction. Nowadays when algos care more about price action and running stops than what news means, it pays to take a deep breath and wait until the market runs out of steam as these type of (over) reactions can run for longer and farther than logic dictates.
This is the hand we are dealt and there is no reason to fight it. Keywords have replaced rationale thought in the world of electronic trading. In addition, there are no longer humans who feel obliged to take the other side of a trade, whether it be an interbank dealer or a stock market specialist. So keep that in mind when you see a reaction to a news event as even the most discounted one may see the market move as we saw with the Bank of England decision.
Addendum: GBPUSD gave back most of its post-MPC gains before rebounding to break through its post-MPC announcement high (1.5476) ater in the day on general US dollar weakness. This does not negate the illogical ”dumb and getting dumber” reaction to the as widely expected Bank of England decision.
Jay Meisler, founder
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