FX market reaction to data releases

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In many countries, notably the US and the UK, a calendar of future releases is published, sometimes covering several months ahead. This allows positions to be taken before US and UK figures in the knowledge that they can be closed ahead of the actual release. Markets normally have a forecast of each release and will react only if the actual figure is significantly different from this forecast.

With many statistical releases, the reaction of the foreign exchange market will take place in two stages. The first reaction will be based on economic theory, while the second will depend on how the authorities are expected to react. Thus higher than anticipated inflation could be expected to lead to a currency depreciating as higher prices will make a country's exports less competitive, but the realization that rising inflation should lead to the gov-

ernment raising interest rates will encourage inflows of short-term deposits. Note, however, that higher interest rates will tend to slow the economy and could thus have an adverse impact on equities. Short-term bonds will react unfavourably to higher interest rates, but long-dated stocks are likely to be helped by the government's move to dampen inflationary forces. As the range of transactions in the FX market has broadened, it has become more difficult to judge the reaction to news and statistics. This has made the use of economists and analysis services more important.

Observation of statistics shows that economies move in cycles of boom and bust or peaks and troughs. Various theories have been put forward for these patterns, ranging from the influence of sunspots to the effect of investment. Market reaction to statistics will depend partly on where an economy is within the business cycle. Thus a sharp increase in industrial output may be welcomed when an economy is in recession, as it suggests that a recovery is taking place that will boost company profits, but a similar rise when the economy is booming may lead to concerns over shortages of capacity within the economy and thereby give rise to fears of higher inflation.

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