News releases can have a massive impact on forex markets in the short term. It’s vital to know which pieces of news to watch out for and how they are likely to affect the market.
The forex market is a 24/7 animal and is more vulnerable than most markets to short term movements following major news announcements. With these announcements coming in from around the world, there’s normally something for an active investor to keep an eye on. Depending on what moves you make, these news releases can be enormously profitable. Be warned, though, this is not for the faint-hearted and even the most experienced trader can’t be certain of getting it right.
Why the news matters
Forex can be highly volatile; it’s one of the main reasons people like it. Markets can move dramatically throughout a day which makes this a fast-paced and occasionally very profitable environment.
There are a host of currencies available around the world which can be easily traded against one another but focus tends to rest on the big eight:
- US dollar (USD)
- Euro (EUR)
- British pound (GBP)
- Japanese yen (JPY)
- Swiss franc (CHF)
- Canadian dollar (CAD)
- Australian dollar (AUD)
- New Zealand dollar (NZD)
Investors may use these in a number of liquid currency pairs with the most popular being EUR/USD, GBP/USD , GBP/JPY. Any news relating to economic performance will have a bearing on how these currencies will move.
The basic measure of value will be supply and demand. This can move alongside economic performance. For example, as a rule, in times of economic boom, there will be more demand for a country’s currency than during contraction. As an economy contracts, then, we can expect a currency to fall in value.
However, this is not an exact science. News releases may hint at the underlying pattern of the economy, but they are not definitive. Sometimes they may be used as an indicator that policy makers are going to take certain actions. However, there is no guarantee those policies will follow expectation.
What to look out for
Here’s a quick look at the new releases you should be looking at and how they can affect the market.
- Interest rate decisions: Central Banks will regularly review economic data and decide either to raise rates, cut them or keep them steady. When the economy is expanding, the bank may raise interest rates to decrease spending and keep inflation around its target of 2%. When the economy is contracting, they may cut interest rates in an attempt to stimulate demand and growth. As a rule, an interest rate cut will see a currency fall in value, but this will also be influenced by market expectation. The decision to cut or raise rates will generally depend on other news announcements, such as jobs news. If these news releases have been bad for the economy, the market may be poised for a cut in interest rates. If the Central Bank decides, instead, to keep things steady, the currency may appreciate.
- Retail sales: The high street can be one of the most reliable indicators about the strength of the economy. When times are good, people, spend and demand for goods and services rises. Inflation can be expected to rise alongside demand for the country’s currency.
- Inflation: Price rises can be one of the most important indicators for forex. Generally speaking, rising inflation will make goods and services less attractive to foreign buyers which can reduce demand for that currency and push prices down. Central banks will generally try to keep inflation rates around 2% to keep the economy stable, so if inflation is lower, you might expect policy to focus on stimulating demand and pushing these higher.
- Unemployment: Rising unemployment is a key sign that the economy is in trouble. When this happens, people have less money to spend and sales figures are likely to slump. If a country announces a fall in employment you might expect their currency to fall.
- Industrial production: Higher production is good news for an economy and means its goods and services are in high demand. They should push currencies higher.
- Business and consumer sentiment surveys: These can be useful but unreliable indicators about future economic performance. They show how confident businesses and consumers are feeling, whether or not they plan to recruit, spend more money and how they feel about the future state of their finances. This can be a useful indicator about likely employment levels and economic performance, but they can come with a big caveat; they only show expectation, the reality may be very different. Even so, poor sentiment can be a self-fulfilling prophecy and could in itself be a drag on economic performance.
- Balance of trade: If a country’s exports are higher than its imports, there will be a relatively high demand for its currency which should have a positive impact on values. Equally, if it’s the other way around, demand may be falling and values will be on the way down.
- Political developments: Politics has a material impact on economic performance and market sentiment. Elections and national referendums can have a major impact on markets. For example, the Brexit referendum sent markets tumbling as investors stayed away from GBP.
These news announcements can trigger rapid and volatile reactions in the market. Traders normally watch them like hawks and can often jump to instant (and occasionally false) conclusions.
Trading in the first few minutes after an announcement can be risky and hard to predict. Spreads can rise and some investors may find their positions wiped out. However, keeping a close eye on markets can help you spot signals which determine future direction and help you make trades based on underlying information.
The contents of this website are intended for educational and information purposes only and do not constitute any form of advice or recommendation and are not intended to be relied upon by you in making (or refraining to make) any specific investment or other decisions. Appropriate expert independent advice should be obtained before making any such decision. We cannot and do not offer individual investment advice.