When a particular currency rallies despite the poor economic performance of the country, it often makes new currency traders confused. Sometimes, the currency can depreciate on the release of positive news. All this happens due to the Discounting Effect taking place in the market. You should understand the Discounting Effect in the Forex Market. These types of effects confuse and bewilder new forex traders. When there is good economic news about United States, commonsense says that US Dollar should appreciate. Similarly when there is bad economic news and there are signs of economic weakness, like unemployment and huge budget deficits, commonsense tell that US Dollar should depreciate.

What is the reason that a particular currency goes up despite bad economic performance of that country or the currency goes down despite good economic performance of that country? This can be attributed to the discounting mechanism of the forex market. Traders try to take into consideration the future expectations about the currency in their present trading decisions. The markets inbuilt discounting mechanism is formed by the anticipatory reaction of the traders. Traders will be bearish on JPY and go short now, if they think that Japan will suffer from the rising oil prices in the near or medium term, thus pushing down the currency. But the traders will be bullish on JPY and go long now, if they have a positive view of the Japanese economy, thus pushing up the currency.

You must have heard the famous saying: Buy on the rumor and sell on the news. This is somewhat similar to this saying. Currency prices integrate the market expectations about the future in this way. Market has already made up its estimates of those figures based on the work of analyst and economists in the major trading institutions like banks or funds even before the economic data is released for public consumption. Suppose, the market thinks that the US Consumer Confidence Index to show a worse figure than the previous month. The efficient market hypothesis says that all available public information is immediately compounded into the prices of the securities. So the market has already compounded that information in the exchange rate of say EUR/USD way before the US Consumer Confidence Survey results are released to the public.

When the US Consumer Confidence Survey figures are released, what will move the market is the amount of deviation between the expectation and the actual figures. The currency pair EUR/USD was rallying due to poor market sentiment for USD. This information has already been compounded into the currency prices. This is old news for the market if the released figures are almost the same as expected. No surprise was caused in the market. Markets don’t like surprises. If the released figures and the expected figures had a wide variation, it would have caused a sudden volatile reaction in the markets. Once the surprise has been perceived and analyzed by the market, it stabilizes.

The release of the anticipated news or data can often cause the currency price to move in the opposite direction initially to where the market had positioned itself before the release of the news. After sometime the market adjust itself and the status quo prevails. EUR/USD pair may even end up declining with the USD strengthening even in the face of a negative consumer confidence number if the US Consumer Confidence Index figures turn out to be almost the same as expected. Thus the lack of any deviation between the expected and the actual figures may cause the currency pair to move sideways or even move in the opposite direction as the status quo remains. This contrarian market reaction is the result of traders who had gone long on EUR/USD closing their positions and taking profit on the news release. 

There are easily 15-20 daily economic data releases relating to the major currencies USD, JPY, CHF, CAD, EUR, GBP, AUD and NZD. Trading news can be a very profitable strategy if you know when and how to enter the market. Forex market react the most to the release of the US economic news. Nonfarm payroll figures usually have a huge impact on the forex market.

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