Definition – What does Market Reaction mean?
A market reaction is a sustained period of volatility or a strong directional movement that follows a news event or a relevant economic release.
A market reaction comes in three basic types:
- Positive: The news or economic release is judged to be good for a country or its currency, so market participants buy in. This sends the currency on a strong upward trend.
- Negative: The news or release is seen as bad for the country or currency, so market participants sell. This sends the currency on a strong downward trend.
- Uncertain: There is no market consensus on whether the news is good or bad, so the currency experiences volatility and price action well outside the normal range. This is also referred to as a mixed market reaction.
ForexTerms explains Market Reaction
Market reactions vary in terms of predictability. Positive GDP growth often boosts a currency, but this depends on whether it is as positive as the majority of the market expected as well as how that growth compared to other countries, and so on. Political instability is usually a surefire way to cause a dip in a currency, but if an inflationary regime is replaced, the market reaction could go the other way. It is possible for forex traders to become very accurate at reading and trading the market reactions to economic reports and other calendar events before they happen.
Doing so requires following world news and economic fundamentals in order to get an understanding of market sentiment leading up to key economic reports. Trading the market reaction after unexpected events like war and natural disasters is much more difficult. Economists or central banks sometimes telegraph economic reports, currency interventions and other economic events to the market. This is done to reduce the severity of the market reaction by releasing the information early.