I have been going through your Mastery Course and my first impression is that while there are many stars on the horizon of Order Flow Trading, you are the Brightest Star of all. My compliments to you on bringing out such an in-depth practical course.
I am still in the process of going through the various chapters of the course, but as per your course instructions, I have already started recording the news events. Last week was a very eventful week for USD related economic indicators. I noted down some strange behaviour of the pair
EUR/USD as described below:
I noted that the whole of last week the sentiment was mostly based on Euro aversion and USD appetite. However when the GDP was released with a huge USD positive figure, the EUR fell by about 20-25 pips only.
Then when the NFP was released at slightly below the consensus value, the EUR rose up tremendously, by about 40 pips. Later when ISM was released with a huge USD positive figure, the EUR started rising instead of falling, by another 15 pips even though the EUR sentiment remained negative. I noted down 2 things:
(i) The expectations from USD were too high
(ii) On all the 3 occasions, EUR/USD started rising sharply high just few minutes, say about 30 – 60 minutes, before the news announcement.
I can understand most of the things happening and the PA going against the news result because of high expectations, but the one thing I cannot reconcile with is why was the EUR/USD rising up sharply on all the 3 occasions before the news results?
Could you please throw some light on the weird phenomenon above.
Yes, there were some fairly high expectations for the U.S. dollar. USD rallying a few hundred pips based on expectations that the Fed may bring forward the rate hike by a few months or so. There was good Q2 GDP data, but part of that was widely expected following suppressed demand in Q1 from the severe winter, which caused pent up demand to be unleashed in the Q2 economy. However, most of the USD rally in EUR and GBP was due to EUR specific weakness and GBP specific weakness. Same for the NZD. NZD/USD falling was a lot due to NZD specific macro. I do not think the data is good enough for the Fed to bring forward the rate hike. NFP has been decent and Q2 growth was stellar, but wage growth remains weak, and the Fed has cited the slack in the labor market. And with crop prices still very low and may go lower, that may contain inflation to not rise that much. So this translate into a macro model of DO NOT SHORT BOTTOM TICK in EUR/USD, GBP/USD, NZD/USD, AUD/USD, etc, as the macro can get exhausted due to the good US data not necessarily causing slightly hawkish Fed.
EUR rising on Friday was due to the mediocre NFP causing USD bulls to get exhausted, and general EUR short covering. There have been a lot of macro traders placing big shorts on the EUR as it grinds lower. Some expect it to be the next big trade like shorting the JPY was in late 2012 and parts of 2013. Also the EUR rise on Friday was due to the EUR/GBP rallying (on weaker UK data, general EUR short covering), causing flows into bullish EUR trades across many currency pairs.
EUR/USD continued to rise even after stronger ISM data on Friday because that strong data was not enough to negate the mediocre NFP causing EUR/USD to rise as well as the EUR/GBP rising flows causing general EUR bullishness for that day. It did spike lower -8 pips FM, then NS and started to rise again.
Overall, I think the EUR from a macro perspective can sell off further. This is due to the CPI going lower to 0.4% in July, despite the EUR sell off, which is a bearish macro sensitivity. If the lower EUR cannot help push up inflation in July, then what will? Currently it is only grinding lower by small amounts of -30 pips and -40 pips or so, due to the ECB being reluctant to give too many hints of QE, and the Fed still says it wants to wait a “considerable time” before hiking rates, due to the slack in the labor markets and low wage pressures and restrained inflation.
People were expecting a recovery in the second quarter in the US due to the nature of the contraction in Q1. The reason economic activity contracted was not due to anything wrong in the economy like excessive debt levels, collapsing housing market, or some other fundamental problem. The primary and overwhelming reason was due to the severe winter. I am not sure where you live, but I lived through the severe winter. It was very cold for extended periods of time. Lots of snow, etc. When weather conditions are that bad across such a large part of the country several things happen: People would rather stay home rather than go out to the local businesses, restaurants, malls, etc. Good and products have difficulty being shipped and delivered. Less people travel by air and by car. Etc, etc. So this can cause a sharp drop in economic activity.
So there was a lot of demand in the economy that wanted to be spent and unleashed into the economy, but the severe weather made them unable to do so. So when Q2 came along and more normal weather, all the demand that would have already happened as normal in Q2, combined with some of the pent up demand in Q1, to form the stellar Q2 GDP number. Does that make more sense from an economies and macro economic viewpoint?
As to your main query about why the EUR/USD rallied pre the GDP, NFP and ISM.
As to the NFP on Aug1, the EUR/USD rose +10 pips in the hours pre the NFP. +10 pips isn’t a very large move, so I wouldn’t go looking for a some super super secret reason for why it happened. EUR/USD just bounced +10 pips off the lows from the previous days drop. It could be just general short covering by a few small macro players wanting to take profits. Similar thing happened today in EUR/USD. The 1.3350 barriers and stops below were knocked out and there was some short covering to cause the market to rally +40 pips or so. The macro is still bearish for a grind lower in EUR/USD, so eventually if the EUR/USD rallies high enough it enticed more macro shorts to come back in and sell it, which could be 50 pips off the lows, or 100 pips, or some other number depending on the particular macro environment on that given moment in time.
I make an effort to try to figure out why a currency did what it did, even some small moves. But I am not going to fry my brain and search for a reason why a currency made every tiny 5 pip, 10 pip move. I focus on the larger movements first and my news impact recording system. If I can’t find a reason after my research is done, then maybe there isn’t an opportunity and I should just sit out and when for the next day’s fresh information flow to re evaluate the situation.
As to the EUR/USD rising pre ISM on AUG 1, it was due to the after effects from the mediocre NFP. EUR/USD was bid on dips even after retracing the FM spike completely. It is very possible for a particular news report to effect the market not just in the few minutes after the news, but in the next few hours as well.
As to the EUR/USD rising pre US GDP on July 30, that’s like another +10 pip move. Who cares about! It could mean anything! It could just be noise. Don’t try to force yourself to analyze such tiny moves. I focus on the more important 500 pip, 300 pip, 100 pip, 50 pip movements, etc.