Applying the Market Reaction Matrix

  1. Figure out what macroeconomic data is being discounted by market participants. What are market players focused on? This information is usually obtained by the news, interpreted by the market from comments of government officials, and most importantly by the correlation of the market to the past outcome of events. Using our Events Calendar to filter out, for example, the country as US, the ECC as INF and select the USD as currency, we might see a net balance of outcomes of events (P-R, P-E, P/R-A, E-A) that indicate inflation to be on a rise, while the USD is rising. We might also see that US bond yields are rising (i.e. the bond market is weakening), while US stocks are consolidating and potentially that Gold is showing some strength, thereby reinforcing our interpretation. In this case, we can state that the “USD is rising on actual rising inflationary pressures most likely due to expectations of rising interest rates”.

  2. Now we are able to interpret resulting scenarios. Using our example, the following scenarios could occur:

    • The USD continues to rise while we have some signs of slowing inflation. This scenario usually represents a runaway market. Fundamental traders who sold USD short based on signs of slowing inflation are being taken out (via hit stop losses) by technical traders. We will often see prices rising at an accelerating rate (the so-called parabolic rise).

    • The USD retraces while we have some signs of slowing inflation. This would represent normal or aligned behavior presenting opportunities to re-enter the market in the direction of the long-term trend.

    • The USD retraces, while we have further signs of rising inflation. This makes it more risky to treat the reversal as temporary – it is more likely going to result in a longer-term price consolidation or turning point. Interpreting the market’s behavior to events further within the price consolidation will lead to more clues.