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Generally, forex markets absorb news releases in minutes. However, research shows that they may take hours, if not days, to react to the new information fully.
Furthermore, investors’ returns may experience fluctuations up to four days after new numbers become public. These assertions make it worthwhile to understand how current events influence forex trading.
FX markets react to economic events
Forex traders base their trading strategies on expected economic trends. Thus, whenever a financial organization makes announcements, the market is ready to react to the stimuli. Seasoned traders keep tabs on an economic calendar to determine their risk exposure.
Economic events usually shed light on macroeconomic trends. These fall into two categories: hawkish announcements are aggressive and result in appreciating currencies, while dovish releases are more peaceful and cause the commodity in question to depreciate.
News releases affect market volatility
In September 2020, the forex charts showed a period of consolidation during the 17 hours leading to the announcement of October non-farm payroll statistics. EUR/USD pip values increased or decreased by 30 during this duration. After the news release, the market became dramatically volatile, with the pair falling from 1.1950 to 1.1804.
Volatility describes the dispersion of the returns of a commodity. Before news releases, traders may remain indecisive, unsure whether to acquire or sell a currency. However, the uncertainty spirals into volatility when the numbers become public, and traders make a decision.
FOMC announcements’ effect on forex
News related to interest rates has a profound effect on forex markets. If the announced rates surpass the expected numbers, traders expect the currency to be bullish. However, lower-than-anticipated rates tell of a slowing economy and depreciating currency.
Thus, when the Federal Open Market Committee (FOMC) announces new interest rates, forex traders act accordingly to respond to the numbers. Remember, the US dollar is the world’s reserve currency, making the rates in the US vital to forex markets. Of course, rates given by the European Central Bank (ECB) are equally important in making decisions regarding the euro.
The influence of market sentiment-related news
Every Friday, the Commodity Futures Trading Commission (CFTC) releases the Commitment of Traders (COT) report. The report aims to inform on one-week-old market sentiments. While the COT mostly applies to futures, traders can interpret it and understand the positions held by parties in the forex market.
Notably, news releases regarding market sentiment affect safe-haven currencies that gain value when turmoil strikes. The market may expect price reversals if very few traders maintain their position to sustain a trend of, say, an appreciating currency. Thus, forex markets keep an eye on sentiments to determine future behaviors.
Explore the news trading strategy
Making trades based on news can be as rewarding as it is risky. It is necessary to combine fundamental and technical analysis before making a buy or sell decision. Remember that new releases, such as the COT report, comprise historical data, making live forex news an indispensable tool. Real-time data is fundamental in preparing for sudden moves in the market.