Consumer price index. Impact of news release on the Pound/Dollar currency pair

Every novice trader who decides to trade using fundamental analysis in Forex faces the problem that he simply does not know how certain news can affect the market, how long the price moves on average after the news is published, and why the market sometimes does not react to it.

Many sites write on their pages about the importance of fundamental indicators and that they can be used to trade, but, unfortunately, it is almost impossible to find practical information on how to apply certain news. 

I also had to face this problem, so I decided to conduct my own analysis and some kind of mathematical calculation.

If you have ever traded on news, then you have noticed that the same news acts differently on each currency pair. This effect is due to the fact that each currency has its own economy, and if the economy is strong and stable, and there was good news before that, then the released indicator for its counterpart may not have any impact at all.

One of the most popular news items that traders trade is the Consumer Price Index. For those who are not aware, the CPI reflects changes in prices for goods and services used by ordinary consumers.

If there is an increase in the index, this tells us that sales are increasing, which directly leads to economic growth, easing inflation and a healthy economic climate. Such a seemingly unimpressive index has a fairly strong influence on the market at the time of its release.

As I already said, in order to understand the real impact of the Consumer Price Index on price movements, I decided to conduct some research on historical data. the pound/dollar currency pair into account because it is one of the most popular pairs that traders trade.

For our observations, we chose only the CPI for the pound, which will give us an objective picture of the impact of the news on the pound/dollar currency pair. Data on the Consumer Price Index for the pound are released once a month, so we decided to conduct an analysis on the last five months and calculate the average price change after the news was released, the duration of the news and information about possible rollbacks.

The first publication of the CPI for the pound occurred on 05/19/2015 and came out with a value lower than the previous one, which gives reason to think that the pound will begin to dive down. You can see the real picture of what is happening at the time of the news release and its end in the picture below:

 At the time the news was released, the market strongly jerked down and went by 120 points, and small pullbacks could be observed in the form of the formation of weak resistance and support levels. It is very important to note that the effect of the release of the Consumer Price Index lasted for four hours.

One of the popular mistakes of traders who use news is the opinion that the price goes through its main movement only at the moment of release. In practice, news can move the price in a given direction for a very long time, so there is no need to rush to exit the position after grabbing a couple of points. It is also worth noting that after the news ended, the price began to form a rollback and sideways movement of 80 points.

The second release date for data on the Consumer Price Index fell on June 16, 2015 and came out with a value higher than the previous one. This tells us that the price should move upward at all times. In practice, the price first moved down, breaking the expectations of the majority. However, after 15 minutes, the news began to work itself out and passed 85 points, and its effect on the price movement was as much as 10 hours, after which the price began to move sideways. You can see more detail in the picture below:

 The third news release was on July 14, 2015. The news came out with a negative indicator, which should have pushed the pound far down, but literally a couple of minutes later news came out on the dollar, which was extremely bad. Therefore, the news simply did not work itself out, and the market simply rushed up due to negative data on the dollar. Example in the picture below:

 On August 18, 2015, CPI data came out above expected values, so the market rapidly moved up. The effect of the news lasted only an hour and a half, but during this time the price overcame 115 points. Also, another big mistake for beginners is to exit when the market weakens, but in this case it was an accumulation of forces that led to a new push. The pullback after the news was processed was 70 points. Example in the picture below:

 On September 15, 2015, the CPI data remained the same, so the price continued its downward trend. The effect of the news lasted 4 hours, and the profit from the transaction could be 120 points.

 Now let's summarize. If we traded with a stable stop loss and take profit equal to the minimum profit on history, which is 85 points, then we would get the following numbers: 85+85+85+85-85 = 255 points of profit.

This is a rough calculation method, because as you can see, on average the news works out by 110-120 points per day. I would also like to debunk the myth that the main price movement occurs only in the first minutes after the news is released, since judging by our calculations, the effect can last from an hour to 10 hours.

In conclusion, I would like to say that trading using the Consumer Price Index is quite profitable, but you need to be patient and not jump out of the market at the first opportunity. Remember, your minimum goal should be 85 points after the news is released, but in your mind you must understand that the price can also easily overcome 120 points.