The impact of news on forex
The interconnectedness of the global financial markets is known to all investors involved in trading. Traders who use news strategy also take into account the huge influence of financial and macroeconomic indicators on global trading platforms.
The Forex market is not an exception and is also dependent on economic and political factors. Trading the news, despite its apparent simplicity, requires the trader to understand the nature of the events. Knowing the specifics helps to trade profitably, avoiding major financial losses.
Macroeconomic data and reports
These are important economic indicators from different countries, which help investors and analysts to make market forecasts. Macro statistics give a detailed insight into important aspects of the economic situation of any country or region. The most important indicators include:
- Information on the level of employment of the population. Here the number of employed and unemployed can be quantified;
- production volumes. The indicator reflects the state of the national economy, namely the level of change in industrial production as well as in public services;
- Gross domestic product (GDP). Reflects the market value of the total number of services and products produced per year in all sectors of the economy in a given country;
Inflation - changes in the price of goods, which leads to a depreciation of money.
Macroeconomic data and reports are one of the main tools of fundamental analysis and are an indicator of the strength of a country's currency. In this case, the principle is followed: a stronger economy strengthens the national currency.
All types of trading - medium and long term - depending on macro statistics. Before and during the news release the volatility of currency pairs increases several times. The unpredictable movements of the price trend "eat'' many orders of novice traders. Incorrectly placed orders to buy or sell assets can at this time close at Stop Loss causing significant losses to investors. Extra caution should therefore be exercised when trading the news.
Perhaps the most noticeable effect on the volatility of major currency pairs is caused by the GDP of the United States. Being the most frequently mentioned and discussed indicator it almost always has a direct influence on the movement of all markets. This is no coincidence as the US dollar is recognised as the world's number one currency.
For example, after the announcement of the GDP results on 31.07.2008 (a real change of 1.9% instead of the forecasted 2.3%), the USD leapt in pairs with other currencies.
This factor is also important in trading because for any investor the political risk is the real threat of a sharp decrease in profits and the emergence of large losses due to the policies of the state, on whose territory the business is located.
The reason for this may be a change in the state's political course or in the government's composition. However, while for some investors such changes are dangerous, for others they are a real earning opportunity. Most businesses invest in economies that are stable and strong with a stable political system. An unstable political system, on the other hand, creates mistrust in the national currency and forces investors to move their money into the currencies of more reliable countries.
Thus, for example, the events of 11.09.2001 did not affect the trend movements of the main currency pairs.
But later, as you can see on the EURUSD chart, the date of 11.09.2001 became the beginning of the bull market for the European single currency. The American dollar began to fall in value against the euro.
In addition, there are several other examples of the impact of political events on the currency market:
Foreign policy tensions between countries. The geopolitical conflict between Ukraine and Russia caused significant capital outflows from both countries and, as a result, declines in both currencies;
Referendums on the independence of certain regions of different countries. A similar political event on the decision to grant independence to Scotland took place in September 2014. The result was pressure on the British pound that lasted several months.
Monetary policy of countries
One of the strongest levers of economic management appears to be the monetary policy that a country's central bank undertakes by influencing the state of credit and monetary circulation. Monetary relations affect trade and the balance of payments in addition to the economic events taking place within a country. The monetary policy of countries is fundamental to the Forex market.
Fundamental analysis always reflects the appreciation of a nation's monetary unit when the interest rate increases. This is obvious, as an increase in a given country's interest rate increases the income of any investor investing in that country's economy. Such investments are considered to be risk-free.
Sometimes a divergence in monetary policy can be observed. An example of this is the United States Federal Reserve's announcement in 2014 of tightening its monetary policy. At the same time, the ECB announced an easing of a set of economic measures.
The EURUSD chart shows a prolonged decline in assets during the second half of 2014 as a result of the divergence between the two monetary policies.