What you'll learn
- Describe the stages of the cycle and their currency effects
- Explain why expectations drive price more than facts
- Read consensus forecasts as the market's baseline
The cycle
| Stage | What happens | Central bank | Currency |
|---|---|---|---|
| Expansion | Growth, falling unemployment, rising inflation | Raises rates or signals it will | Tends to strengthen |
| Peak | Growth slows, inflation high | Holds; market watches for the turn | Mixed |
| Contraction | Growth falls, unemployment rises | Cuts rates | Tends to weaken |
| Recovery | Growth returns, inflation low | Holds low, then signals rises | Begins to strengthen |
Expectations
Every scheduled release has a consensus forecast, the average of economists' estimates. The market positions for that forecast in advance. When the actual number arrives, the price reaction depends on the surprise, the difference between actual and forecast, not on whether the number was good or bad in absolute terms. Strong growth that was expected to be stronger is a negative surprise, and the currency falls on it.
Priced in
A rate rise that the market gives a 95 percent probability to is priced in: the currency has already moved. On the day, the announcement itself moves it little, and the reaction comes from what the central bank says about the next decision. Traders track those probabilities through interest rate futures and swaps, and the phrase market pricing means exactly that.
Reading the cycle for trading
Identify where each major economy is in the cycle and which way its central bank is leaning. The strongest trends in forex come from two economies at different stages: one raising rates while another holds or cuts. Those divergences last months and they are the trades that reward a fundamental view.
Key takeaways
- Expansions bring rate rises and stronger currencies; contractions bring cuts and weaker ones.
- Price reacts to the surprise against consensus, not to the number itself.
- Priced in means the move has already happened.
- Rate divergence between two economies produces the durable trends.
Knowledge check
Trading forex, CFDs and other leveraged products carries a high risk of losing money. This lesson is general education, not advice. Risk disclosure.