The market experiences a sharper decline when expectations for positive news are high but go unmet. This phenomenon is not limited to the forex market; even the typically stable stock market is now displaying volatility.

Lately, economic data releases seemed unsatisfactory. China, Japan, Europe, and even the 'recovered' Uncle Sam showed unstable performances, and it is reflected on market movements. The more the market wishes for 'good news', the harder the market fall when it doesn't happen. Not only forex market, even stock market that's usually relatively calm, now bouncing.
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Gaps Between Financial Sector and Real Economy
Economist Robert Wiedemer, sometimes ago said that US financial future reveals a split personality. On one hand, there is asset price bubble, stocks keep rising as well as real estates, and it should encourage people to spend more. Increased consumption then will be followed by energetic business activities, creating more new jobs in the economy. But in reality, employment opportunities are not growing as hoped. That is the reason why the economy will go much slower.

Disconnected linkages between financial sector and real economy is one of the many characteristics of a liberal economy. Not only the US, UK too experience the same problem. Financial sector keeps getting bigger, but any surpluses turn back to derivatives, instead of trickling down to real economy. Financial market advances have made trading profitability infinitely higher in financial market, and so they are hesitant to lend any to society. Bank of England have tried to encourage banks through low interest and Funding for Lending scheme, but the result was quite different than what they are hoping for. It is still difficult for small and medium enterprises to apply for loans, instead housing loans grew faster, raising concerns about bubble in property.
ukFears of Deflation
Yesterday (6/2), Bank of England and European Central Bank decided to hold interest rate at 0.5% and 0.25% respectively. President of ECB, Mario Draghi, once again asserted that they will hold interest rates at that level or lower, for the time being overlooking the threat of deflation. The decision could be seen as central banks' policy to proceed with caution in addressing unstable regional economic recovery and the side effect of emerging markets turmoil.

Unstable recovery could be seen from inconsistent economic reports. This is, of course, is a source of concern. What's more, apart from slowing economic growth since 2013, the world also have to deal with time bomb named China credit crunch. Drop in commodity prices, particularly Crude Oil and Gold, aggravate the situation.

Some analysts said that this is just a moderated growth, but others implied that this could be the beginning of recession. Fears of deflation represents the second opinion. Learning from Japan, a few years ago they aren't aware that they experience decline until it is almost too late. This is what people, mainly investors in Europe, are afraid of.

In forex market, these conditions are reflected on high volatility. On one hand, high volatility enables traders to harvest more profits. On the other, volatility makes risk increases. Direction of price movements become much more unpredictable, and up/down levels become sharper. That's why, it is important for you to solidify your money management. It is also advisable to diversify your investment while there's still time. Underpriced commodities shall turn into huge profits in teh next two-three years. What you should remember is that the economy lives in a cycle; and that there's always revivals after slumps.

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