How news and especially economic news affect Forex trading, what to do about this?

Economic-news-affect-Forex-trading

 US-China trade war was one of the most significant events occurred in the last decade. The trade war was a top news headline for almost 18-months along with Brexit and Middle East issues. But analysts are trying to figure out the impacts of such economic and geopolitical forces on the Forex market.

According to the researchers, news headlines around the world have a substantial influence on the major and minor currency pairs at the Forex market. Moreover, Forex traders wait for the U.S economic releases before taking any long or short positions. The market expectations suddenly change when there is big news that might impact the lives of millions. The traders face the dilemma of greed and fear and follow the market trend to buy or sell the currency pairs.

In figure 1, we have a chart of the USD/JPY pair since 2015. In June 2015, USD/JPY was traded 125.89 whereas in August 2016 it declined significantly to 99.382. So it can be inferred that the trade war between the US and China declared by President Donald Trump had a significant impact on the Asian market.

What are the factors top academicians telling us about the shock of news in the Forex market? According to the key factors provided by the scholars, while the currency pairs show movements on the events, the degree of movement can’t be measured. The key factors are: 

  Key Factors

  • Major world issues like war, commodity prices, GDP, and unemployment can generate long-term stress on the Forex market.
  • The short-term movement of the currency pairs can occur when economic data is released.
  • The most impactful factor to create large movements in the Forex market is U.S economic releases. 

 

One of the major world events that challenged the Forex market in 2016 was Brexit. On June 2016, the citizens of UK votes to leave EU. After the news breakout, GBP/USD fell to 1.207 in March 2017 from 1.46 in May 2016.  This is a clear indication that news actually work in the Forex market. After some strength regained at 1.42 in April 18, GBP/USD eventually plummeted to 1.19 once the news of British parliament approving the withdrawal act was on the horizon. The figure 2 is the graphical representation of the event occurred after the Brexit.    

The Economic data release is also a major factor to shift the momentum of the Forex market. So Forex traders must know in which day of the week the economic data will be released. There is a range of economic indicators that are considered important for each country. Some of the indicators to watch out before locking a trade are: 

  1. Unemployment rate
  2. Consumer price index
  3. Interest rate decision by the central bank
  4. Trade balance
  5. Industrial production

So far, from all the market shifters U.S economic releases have the deepest impact in the Forex market. According to the statistics, 90% of Forex currency pairs have U.S Dollar on the other side. So the majority of the professional traders keep an eye on the U.S economy each week to find a good trading position. Each time when an economic release happen the market behaves positively or negatively according to the performance of the U.S economy. Some of the biggest market-moving economic releases are:

  1. U.S Nonfarm payrolls data
  2. Housing Data
  3. Purchasing managers’ Index
  4. Fed interest rate decision

Now what to do to tackle the outrages of financial and economic news that changes the energy of the Forex market abruptly. As a Forex trader, you must understand that the market is watching the news 24/7 and using the news results as a catalyst to set direction. Once the news spread across the globe nothing can be done thereafter. So the trick is to get the news before it is published in the media. As a result, you get some time to secure your position and lock some profits. The study on the Forex market found that the impact of the news might last ranging from hours to a few days, in general.

The bottom line is that news is the most significant force of the Forex market that can break the current trend within hours. Furthermore, traders who don’t consider the global and economic releases might miss the overall trend of the market. Such failure in utilizing the news can have a devastating effect on the profitability of the individual Forex Trader.