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Low trading volume, analysts say, is partially to blame for sudden, drastic moves
Both the pound and euro booked significant losses against the dollar in the span of about an hour Friday, after a reading on U.S. consumer-price inflation came in stronger than expected, surprising traders who were expecting a weak number.
The moves were each equal to about a one-cent drop--a massive move in the currency market.
The euro (EURUSD) fell from around $1.1130 ahead of the data, to a session low of $1.1000 , while the pound (GBPUSD) dropped from around $1.5640 to a session low of $1.5496 .
The relatively sudden fall is one example of the extreme volatility that can occur when trading volume is thin, and the market is overwhelmingly positioned in anticipation of a single outcome -- and then an economic report surprises.
Read: Why liquidity is drying up in the currency market (http://www.marketwatch.com/story/why-liquidity-is-drying-up-in-the-currency-market-2015-03-25)
Economists polled by MarketWatch had expected inflation to have declined in April from the previous month. Instead, it rose at its fastest pace in nearly 2 1/2 years (http://www.marketwatch.com/story/dollar-slips-against-yen-as-investors-await-boj-kuroda-remarks-2015-05-22).
Analysts said that, while they didn't have reliable data on trading volume in the currency market, anecdotally, they could attest that many traders in the U.S., Switzerland , Germany , France , and the U.K. had left early for the long weekend, causing volume to slump, and volatility to rise.
Dean Popplewell , vice president of currency analysis and research at Oanda, noted that "liquidity is a lot thinner than you think," on Friday before the Memorial Day holiday.
Read: When do markets close for Memorial Day (http://www.marketwatch.com/story/when-do-markets-close-for-memorial-day-2015-05-22)?
Liquidity has been a problem for many markets, including currencies. It's particularly jarring for traders during periods when the market is shocked by a surprise move -- one notable example was the wild moves that followed the Swiss National Bank's decision to abandon a fixed peg to the euro (http://www.marketwatch.com/story/swiss-currency-reserves-edge-up-in-january-2015-02-06).
- Joseph Adinolfi ; 415-439-6400; [e-mail]
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(END) Dow Jones Newswires
05-22-15 1235ET