The Impact of News Releases on Forex Markets

At Market Chaos we believe that there are basically three types of economic news responsible for pip generation: economic numbers, speeches (e.g. central banks press conferences) and Geo-political news. These news releases are the accelerators of major market moves. When the news is released, the market converts it into greed, fear and/or uncertainty.

1. Economic Numbers Economic numbers are any economic news releases by any recognized body that prints a figure. This type of economic news usually has an expected reading by the market called a consensus. The difference between the actual figures reported and the consensus is called the expectation gap. It is this expectation gap that is responsible for the majority of pip movement. For example, if the US non-farm payrolls printed a negative figure when the market expected a positive one, we have a huge expectation gap and we should expect a massive sell – off of the USD under normal market conditions. This form of economic news is the easiest of the three forms to trade as the market movement will normally be in black and white. Either the pair moves decisively up or decisively down with no whipsaws. Examples of this type of economic news include Trade Balance, Inflation figures, Employment Data, Retail Sales Figures, PMI figures and Surveys. It goes without saying that economic numbers are our favorite piece of news for trading.

2. Economic Speeches These are speeches by the central bank representatives. The importance of these speeches to market participants is that the market will use these speeches, central bank minutes, and monetary committee votes to determine the likely timing and magnitude of the next rate hike or rate reduction. Central banks update the market on their view of the current economic status and give the market their projections and estimates of the near term direction the economy is going to take. These views and projections are the ones that determine the monetary policy tools and likely action that the central bank will take. Central bank speeches fall into two categories of tone: Dovish tone and Hawkish tone.

a) Dovish tone The central bank is more concerned about poor economic growth or sometimes lack of economic growth and extremely low inflation rates that might set an economy into the path of economic recession, or even depression. Here the central bank will be more inclined to reduce interest rates so as to aid economic recovery. A dovish tone will cause a sell off in a currency.

b) Hawkish tone A hawkish tone is expressed where the central bank is concerned about the rapid and sustained pace of economic growth that might raise the inflation rate above the set inflation targets. This will trigger the central banks to raise interest rates in an effort to contain both the pace of economic growth and inflation. A hawkish tone leads to a bullish run on a currency.

c) Why trading economic speeches is tricky Most economic speeches lead to whipsaws where a currency tends to move strongly in one direction only to immediately reverse and move strongly in the other direction. The reason for the wild price movement is that the market reacts to each and every word of the speech so any words that seem contradictory will cause a whipsaw. This price movement usually stops a trader out even though he/she might have been correct in the overall direction of the currency.

3. Geo – political news Any news that affects the market that is not economic news is referred to as Geo-political news. This type of news is usually a day trader’s nightmare as it is unpredictable in terms of timing. Events like the current Corona-virus pandemic, the 2019 China - US trade war, and US - North Korea war threats fall into this category. These events take precedence over all manner of economic news. Sometimes the events move in a traders favor and sometimes they are against him/her. At best it is difficult to design a trading plan around these events, as they are random. Such events favor bullish moves in safe haven currencies like the United States Dollar (USD), Japanese Yen (JPY) and the Swiss Franc (CHF), and massive sell-offs in risky currencies like the Euro (EUR), Australian Dollar (AUD), New Zealand Dollar (NZD) and the Great British Pound (GBP).