A great advantage of trading currencies is that the forex market is open 24 hours a day, five days a week. Markets move because of news, so economic data is often the most important news for short-term movements. This is especially true in the forex market, which responds to US economic numbers, and to news from around the world. Before developing a strategy to trade forex on news releases, you must consider which news events are most relevant to trading forex and are worth trading.
The reason to trade the news is because it increases volatility in the short term, so obviously you should only trade news that has the best market-moving potential for the currency market.
The Key News Releases
When trading news, first you need to know which releases are actually expected that week. Knowing which data is important is also key. In general terms, the most important information relates to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and industrial production.
If you refer to the Economic Calendar, you will notice that the most important events usually relate to changes in interest rates, inflation, and economic growth, like retail sales, manufacturing, and consumer sentiment.
Here are some examples:
- Interest rate decisions by central banks
- Retail sales
- Inflation (consumer price or producer price)
- Unemployment
- Industrial production
- Business sentiment surveys
- Consumer confidence surveys
- Trade balance
- Manufacturing sector surveys
The relative importance of these releases may change depending on the state of the economy. Therefore, it is important to keep on top of what the market is focusing on at that specific moment. This is also dependent on what is currently happening in the world at the time.
For example, interest rate decisions may be the main focus during a certain time, so it is important to stay informed and know what the market is focusing on at any moment. The news that usually drives price action and produces volatility includes:
- Changes in central bank policy (monetary policy)
- Shifts in government policy (fiscal policy)
- Unexpected results in economic data releases
- Random tweets from world leaders
- US has the Biggest Market-Moving News
The markets react to most economic news from different countries, but the biggest market-moving news comes from the US. The United States is still considered the world’s most powerful country and it still has the largest economy in the world. The USD participates in about 90% of all forex transactions, which makes US news and data important to follow.
Some of the most volatile news for the US include inflation reports and central bank speeches but also geopolitical news such as:
- Pandemics
- Wars
- Natural disasters
- Political unrest and protests
- Upcoming elections
These may not have as big an impact as the other news, but they are still significant. The next step is to determine which currency pairs you should trade.
Choosing Currency Pairs to Trade the News
It is important to choose the appropriate currency pair when trading the news. You should take advantage of the short-term spike in volatility while keeping your transaction costs as low as possible. News can bring increased volatility in the forex market and more trading opportunities, so it is essential that you trade currencies that have deep liquidity. Currencies with deep liquidity have the tightest spreads, so you can keep your transaction costs low. The major currency pairs have the most liquidity and usually the tightest spreads.
- U.S. dollar (USD)
- Euro (EUR)
- British pound (GBP)
- Japanese yen (JPY)
- Swiss franc (CHF)
- Canadian dollar (CAD)
- Australian dollar (AUD)
- New Zealand dollar (NZD)
The following currency pairs show the liquid pairs derived from the eight major currencies:
- EUR/USD
- USD/JPY
- AUD/USD
- GBP/JPY
- EUR/CHF
- CHF/JPY
Spreads widen when news reports come out, so it it is wise to choose those pairs that have the tightest spreads. Now that you are aware of which news events and currency pairs to trade, let us consider some approaches to trading the news.
How to Trade the News
The most usual way to trade news is to look for a period of consolidation or uncertainty ahead of a big number and to trade the breakout on the back of the news. You can do this on a short-term basis as well as over several days. Trading news is not as easy as you might think. The main reason is volatility. You may make the right move, but the market may not have the momentum to sustain the move.
Final Thoughts
The currency market is particularly susceptible to short-term movements generated by the release of economic news from both the US and the rest of the world. If you want to trade news successfully in the forex market there are a few important things to consider such as knowing when reports are expected, and understanding which releases are most important given current economic conditions.
Also important is knowing how to trade based on this market-moving data. Just do your research and stay on top of economic news so you will be able to gain the rewards of trading the news.
