Would like to hear your opinion on news trade for GBP/USD CPI y/y.
On the FM, price drop 49 pips due to lower than expectation number, I went short with stop loss of 50 pips (hi of breakout bar on M1 chart). Then stops at 1.5050 tripped but later price bounce back and my positions stopped out.
How would you see and trade for this case? Looking forward to your guidance.
This is a very good question.
When I was doing my news analysis the day before, in my records I saw that a -0.1% deviation from forecast for the CPI number was not enough to cause much after FM spike momentum. In other words, a -0.1% deviation would only cause a FM spike, but with a high likelihood for it to stall out and not go for more. I had to go back to my 2012 currency files and look it up since that was the last time the number came out -0.1%.
The only recent data for this year showed that on May 21, when the CPI came out -0.2% below forecast, the GBP/USD was: -22 pips FM, then down sent shift for another -77 pips.
The problem with shorting the GBP/USD today after the FM spike down, is that it was only -0.1% deviation instead of the needed -0.2% to cause a sustained move.
But also, the FM spike down today was -55 pips for the GBP/USD. So a lot of the repricing happened in the FM spike already. When on May 21, the GBP/USD only dropped -22 pips on a -0.2% deviation, which gave it some room to go down further because it wasn’t a big FM spike.
So part of the preparing for the news analysis is that you try to go back and see what the previous deviations from forecast caused. Whether they caused sustained moves or NS spikes, etc.
Then you also have to take into consideration the current market environment on the specific day today. The market wanted to be in covering their long dollar positions, so used any dips in EUR/USD and GBP/USD and AUD/USD, etc to cover their short trades.
Then you also have to take into consideration how big the FM spike is going to be. If the FM spike is too big, then there may not be much potential for it to go for the “news spike + Go for intraday move”
In the case today, the GBP/USD spiked down -50 pips on a -0.1% deviation
When on May 21, the GBP/USD spiked down only -22 pips on a -0.2% deviation
So clearly, the GBP/USD wasn’t a particularly attractive short trade after the big FM spike.
That would be my analysis of the situation. I hope I gave you clarity on how to prepare better for news reports in the future!