Now the move we’re going to be looking at here in this trade example is a quick 50 drop in the Pound-Dollar.
So what we’re going to do is break this down and see how you could have predicted and caught this move using our market commentary.
First of all, we need to understand the context, or the baseline surrounding this pair before the move took place. And that is very simple on this one.
In the Financial Source new feed we had a headline in the news that broke to cause this spike down in the GBPUSD. The context were these three words, “BoE Saunders, Hawk,”.
Michael Saunders, was giving a speech that was scheduled on the calendar. And he was or is a Hawk. So, from this we know that he’s usually upbeat about the economy and favours tighter monetary policy.
Now if you’re wondering how you can figure out whether or not the Central Bank members are Hawks or Doves, if you go to our Currency Research section in Financial Source we actually have a Hawks and Doves cheat sheets for the major central banks.
So for example, Michael Saunders is noted on the cheat sheet as a Hawk. So you can prepare for this well in advance for any speeches that these guys are making.
So that’s the baseline context. Now once the baseline is in place, the next step is to identify the type of breaking news that would generate the biggest market moving shift.
Now, if we have a Hawk, the big trigger or the big shift is going to be if the Hawk says something dovish, right? Or if a Dove says something hawkish.
So going into Saunder’s speech, we knew if he said something dovish, that was going to cause a move. Now all we needed was a trigger.
In other words, we needed him to say something that will causes a sentiment shift. We needed him to say something dovish. So whatever we identified ahead of time, we need that thing to actually take place.
And of course, he came out saying that, “The prolonged Brexit uncertainty could warrant looser monetary policy”. Now normally a Hawk would target tighter monetary policy, and higher interest rates.
So for a Hawk to say that there could be a scenario where they would give up on that, and warrant looser monetary policy, that is pretty dovish. And that is going to cause the currency to fall.
And the reason for that is if you look at the way the central bank’s board is composed, usually you’ve got a balance of Doves and Hawks. So if the Hawks give up and go over to the Doves, the balance is tipped.
This means the likelihood of lower interest rates and looser monetary policy actually increases significantly. Which of course is negative for the currency.
From the time that the audio squawk came out with the news we had at least 30 seconds to one and a half minutes to digest this headline and recognize that a Hawk has just been dovish.
And then of course when the market reacts, the price is only going to go one way. Once the market digested that and reacted, we saw that quick 50 pip drop in the pair.
So if you’re interested in learning more about how our market commentary can help you interpret the news, and fundamental analysis and turn it into profitable trades like this, check out our Financial Source Trading Terminal.
In the video above we go into this move in detail as it transpired on the charts so don’t miss it.