This famous trading saying has a lot to do with expectations. In fact, this occurs when the market expects a certain outcome and trades accordingly leading to the event. The market is forward-looking in nature, so you should always focus on the future rather the present.
If an event comes out as expected, then you will most likely see a “profit-taking” reaction, with the price action going against the outcome even though "logically" it should trade according to it. That’s why you should always be aware of what is expected and thus priced in before an important market-moving event.
You experienced a form of this with the FOMC Meeting outcome on the 16th of March last week. A lot of the hawkishness and expectation about rate hikes was already priced in. As the Fed delivered on expectations with little surprises, the market just went in the opposite direction. This doesn’t mean that the market will start a new trend though. It’s just not a good catalyst for a further push in the previous trend and you just need to wait for another catalyst or get back in at better prices as you see fit.
On the other hand, if the market gets surprised by some unexpected event, then you will see it trading according to that outcome. The more the market is surprised and the stronger the reaction will be as the market reprices the new information.
An example of such a surprising event is the FOMC Meeting of the 16th of June 2021. The Fed surprised with such an unexpected hawkish take that the market reaction was incredibly strong with EUR/USD pair for example falling for hundreds of pips with little to no pullback in a couple of days.
This is also why central banks try to let the market know their future actions as transparently as possible via their forward guidance and avoid such strong reactions in the markets.
This article was written by Giuseppe Dellamotta.