What is deviation in forex?

Fat Finger

Deviation in forex often refers to the deviation from the expected value when an economic report or data point is released. For example, if economists expect the consumer price index (CPI) reading for a certain country to be 2.1% and then the actual figure released turns out to be 1.8%, the deviation here is -0.3%.

Some news sources refer to this news deviation as the surprise index. The element of surprise often moves markets if it is large enough, particularly with important news. For example, in April 2019, the Reserve Bank of New Zealand was expected to reduce interest rates by 0.25% points. However, the bank ended up shocking the markets and reducing the rate by 0.50% points. This caused the New Zealand dollar to decline sharply.

The efficient market hypothesis can explain why large news deviations, or surprises, cause quick and large market moves. The hypothesis posits that markets price in new information almost immediately, and this surprise entails new information. Traders rush to incorporate this new information into their analysis, which can be seen in their positioning.

When there is little or no deviation from expectations, markets often do not show much of a reaction, or the reaction would not be so strong as to when the surprise is bigger. Often, when the news comes exactly as expected, some traders close their positions to take some profit. This might cause a slight reversal in price action, despite a seemingly positive (or negative) news.