AS you choose the news events to trade,you should know that all news events are not treated equal. Know which news events to always give attention. Though attimes the big guys in the market tent to manipulate news release, we still see strong price movements at the release of these events.
In this article,we shall look at the major news events that shake the forex market prior and after release. These news events never fail to cause a spike prior to and after release. They can change the entire direction of the whole trend. Therefore it’s a big deal once you get it right.
So what are these giant news events, take a look…
Interest rate decisions (monetary policy)
Interest rate changes have a great effect on exchange rates because they dictate the flow of money.
When the central bank raises the interest rate, a few individuals can afford to take loans from the bank. Instead they will opt to save to make profits. On the other hand when the central bank cuts the interest rate, many people take loans because borrowing is cheap. People spend more and save less.
How will that affect the forex market?
A raise in interest rate raises the exchange rate showing an appreciation in the value of the currency. At the release of news, we are likely to see a spike up in the market indicating increase in the value of the currency. The reverse is true.
The effect of the decision on the country’s currency largely depends on the accompanying central bank’s statement.
If the central bank raises interest rate but continues to highlight the weakness in economy such as unemployment, expect a slight sell-off to follow. However, a statement that emphasizes higher inflation in the future can lead to a stronger economy. Thus a strong bullish market following.
It is very important to know the release time and date of interest rate decision for each economy. This helps you to prepare in advance even if you don’t trade news. It helps you to avoid taking a position when the news is about to be released or to keep your stop loss intact to avoid large losses.
Non-Farm Payroll (NFP)
NFP is the most volatile of all. The non-farm payrolls report shows the change in the number of people employed during the previous month in the U.S. It measures the number of jobs created in the non-farm sector in the U.S. in a month.
NFP is well known for causing large spikes in the market. It can cover more than 100 pips, just in a few seconds after release. NFP release is always on the first Friday of every month at 8:30 AM, EST (1:30 PM, GMT).
After the release of NFP, almost every economy shakes. Depending on the news outcome, expect to see strong movements on all currencies paired with the dollar and more likely those highly correlated with the USD. For instance, Gold.
When the actual is less than expected, it shows fewer jobs created in the U.S. economy in the previous month. USD goes more bearish in the forex market.
When the actual is more than expected, it means the U.S. economy had more jobs created during the previous , USD goes more bullish.
The unemployment rate measures the percentage of the labor force actively looking for work/jobs. Unemployment is an economic lagging indicator.
Even with a good GDP or NFP/employment changes, unemployment rate can largely influence Fed decisions. This means any strong divergence from expectations can bring big impact on Forex market.
The Unemployment rate data release is every month alongside employment changes from every economy for the previous months and NFP for the U.S economy.
A less than expected unemployment rate causes the market more bearish and a higher than expected rate results to a bullish market.
Gross Domestic Product (GDP)
The GDP measures the change in the total value of goods and services produced domestically. GDP release is on monthly, quarterly and on a yearly basis. It is highly correlated to CPI, PPI and mostly retail sales. These AFFECT the forex market the same way and are used measure inflation.
Better-than-expected figures will probably be bullish for the currencies from the respective economies .This means that economy is doing well as well as its currency.
However, if the data release is less than-expected, this means the economy is doing badly and the market goes more bearish.
Now that you know what news events to focus on, let’s see what you need to know about the forex market news.
What do you need to know about the forex market news events?
The most important thing when it comes to forex market and news releases is not just what the actual release means but how the market anticipates the release and reacts to it. This is where the trading opportunities come in.
The market is priced in relation to the forecasted data. It is the traders’ expectations that move the market
As a rule of thumb, after the release of news, and the numbers are not as expected, we expect to see a strong movement in the market. More than expected the market goes bullish and is the right time to buy. Less than expected, the market goes bearish and traders selloff their positions.
However, there are times when news release is below expectations and the market goes bullish. Or above expectations and the market goes bearish.
This is the time after taking position with all the excitement, the market strikes your stop loss just in a blink of an eye. Then you wonder what a hell went wrong. Thanks to your discipline you had a stop-loss.
Ok! let’s get to the point.
Why the forex market falls when news release is more than expected?
This happens because the big traders/market makers have already adjusted their positions, following the forecast. At the point of news release, they are already taking their profits selling off their positions.
For example, if market participants wait for the Bank of Canada to raise its interest rate, the exchange rate of the CAD will be rising before the bank’s meeting (the market makers will hold positions in the market following the forecasted data).
Once the BOC raises its interest rate, those market participants who were ready holding positions would probably start selling CAD. The pairs such as CAD/JPY, CAD/CHF will actually decline and not increase after the rate hike.
The most important thing you need to keep in mind is that;
If you choose to trade news, you don’t need to trade all Forex news events. Concentrate on only the major market movers, news which can cause large moves in the market.
Trade only when you can establish a firm bias and when you can support your trading idea. Have a plan before taking a trade and trade only your plan.
You need to pay attention first to which currency to trade, the position (sell or buy) and the reasons why you are selling or buying. Analyze the currency pairs for the economies that are likely to be affected by news and watch their movements closely.
You also need to know what the market expectation for that Forex news event is. Every economic calendar comes with forecasted figures for all Forex news events so this is easily accessible to you.
In addition to that, you need to study the current market sentiment by looking at the price action and using technical analysis tools.
Compare the two with the impact of expected news release and see if the three are in agreement. There you can gauge on which direction the market is likely to take.