The headline effect refers to the impact of bad news from the popular press on a an economy and its currency. When negative financial news is carried in the newspapers of TV news shows, it reaches a wider audience and consequently the public reaction is more extreme. When negative news breaks, the headline effect can create an opportunity for forex traders.
Public reaction to bad news is often out of proportion with the reaction to the same degree of good news, thus central banks or government officials that release an unfavorable report are punished when investors, traders and regular people begin selling, shorting and converting funds away from the affected currency. The market reaction is a natural one, so the headline effect simply increases the speed (and often the severity) of the market reaction by bringing bad news to the forefront. For example, widespread coverage of the Greek debt crisis had a clear headline effect on the euro as a whole.
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