Question regarding EUR/USD and homes sales news

[Alexbabwa]

Hello all, i made a lot of pips today (or what i consider to be a lot) but i am not content with it. The reason is because i don't fully understand why the price went my way.

Trading the euro dollar at 15:00GMT the US homes sales data was released and it was very positive, the market seemed to react to it instantly. In seconds the price went from 14,332 to 14,376. I had a buy position that i was itching to sell (glad i didnt) once i had heard the news, as the positive US data should increase the value of the dollar right? if only temporary. This would weaken the euro against the dollar and the EUR/USD price should fall. However as you may already know, or can see from the numbers i wrote, the initial reaction was a stronger euro and a weaker dollar.

So i am wondering, perhaps there is data regarding the euro zone that came out just before that i missed?

The price went down after this inital burst upwards which reassured me i had interpreted the news correctly, but still can't understand why that wasn't the first reaction.

I am quite new to forex as you can imagine. Could any more experienced forex traders shed some light on this? i would be very interested in hearing your opinion.

 

[Rhody Trader]

The general reaction to good economic news right now is dollar negative because the USD has been in large part a risk aversion play. When things look good the risk aversion eases and the USD loses ground (JPY too). The initial reaction today was in line with that bias, but like when the payroll data was released a couple weeks back there was a sharp turn. My suspicion is that short-covering probably was responsible in large part for that action.

 

[Alexbabwa]

Thank you for your reply. I am quite confused, i hope it is just because im a newbie. People invest in the dollar to avoid/minimize risk? Good news reduces the amount of risk aversion in the trader sentiment? So then why may people be covering?

Im thinking there was quite an uptrend leading to the news, so i wonder why people would cover at the first sign the market may move in their desired direction.

I think i have confused myself further. Could you reccommend any reading? articles or news that could help me understand.

 

[Rhody Trader]

They covered their shorts exactly becuase there had been quite a trend against the USD. You have to keep in mind that it was a summer Friday as well. Low volume and folks not wanting to carry positions into the weekend.

As for recommended reading, this is one of those things you can't really read about. It's something you have to learn to recognize from observation. Right now risk aversion and it's opposite are the big things. Other times the markets are fixated on interest rates, or trade figures, or inflation. You just have to pay attention to how the market reacts to events to get a feel for what the main drivers are during a given period.

 

[Alexbabwa]

So it was a coincidence that they decided to cover as the news came out? This is probably too advanced for me at the moment, so i will continue to read up and watch the market. Thank you for your replies, it has given me a slightly new direction to study.

 

[Rhody Trader]

No coincidence. The short covering would have been planned out in advance.

The main point is that you cannot expect the market to always react as you think it should to news and data. The market is anticipatory.