Update 1.03 gmt:
It looks like the big money is positioning for a move up today? I might leave my UJ long as it is, but there is still too much uncertainty for my liking, to enter the market in any direction right now.
Earlier today I thought that the EURUSD and EURJPY were on the way up, at least to the 50% Fib of the recent swing down. But the bounce from the probe below has been weak, tentative, and we’re now treading water before the raft of US data due in an hour. We could go high from here, but the bigger trend is down, so we could turn swiftly lower. Right now the risk is more to the downside, especially in the Euro, imho.
I plan to remain flat (I am looking to exit the USDJPY long that is open), although the UJ long is less risky than the Euro pairs. I will assess the situation after the US GDP data is out.
Big players use the data as an opportunity to do what they plan to do anyway, and the analysts later will find some spin on the data to interpret the FX moves. For example, if the GDP comes at or above expected range, and if the EURUSD goes up, they will say ‘The US recovery is on track – global risk-on, hence EURUSD is up’. On the other hand, if the EURUSD goes down on the same data, the analysts will say ‘The US economy is getting better, treasury yields are higher and the EU is weak, so the dollar is getting stronger.’ The point is that the data does not cause the move, the move is caused by positioning and speculative flows. It is money speaking. Technical analysis is the best tool to get clues to positioning and capital flows.
The lesson for traders is not to always look for logical, economic reasons for the way the markets react to economic data. Economic data shapes perceptions of market participants over a period of time and the actions of market participants in turn determine the market direction. There is an intermediate step of interpretation by humans between data and price action. The human step is affected by emotions – fear, greed, anger, pride, etc. The intermediation happens over time and can go in any direction – humans are unpredictable. The human mind can rationalize anything, any step that the individual wishes to take – everyone should try it sometime.
So it is a waste of time to try to guess the immediate impact of economic data on forex moves. Fundamentals work in the long run, but are worse than useless in the short term, they are actually dangerous!