The Role of Forex News Events in Shaping Currency Trends

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The forex market is the most active in the world, processing more than $7.5 trillion worth of trades daily, as of April 2022. The foreign exchange market is open 24 hours a day from Sunday. 5 p.m. to Friday, 4 p.m. EST, making it significantly more volatile compared to the stock market and alternative assets.

Financial parameters, including a country’s economic data and interest rates, are some of the most significant market movers in the currency market. Geopolitical developments often cause significant fluctuations in exchange rates, reflecting how speculators perceive trade volumes to change between two countries. For instance, the Russian ruble fell to an all-time low in February 2022 after Russia invaded Ukraine as Western countries imposed wide-ranging sanctions and reduced imports.

Forex Trading and the News

Forex trading is the exchange of fiat currencies of different nations, facilitating international trade. For instance, a U.S. resident wanting to buy a British car has to find an automotive dealer who imports vehicles from Great Britain. The dealer has to pay in Great British Pound (GBP), and the American buyer purchases the vehicle using U.S. dollars.

Major developments in a country impact its trade relations with other nations, thereby impacting its exchange rate relative to other currencies. A nationwide labor shortage in England, for example, might increase the total cost of manufacturing vehicles, thereby making British cars more expensive in the U.S.

You cannot be a successful forex trader if you don’t keep up with the news. However, it is essential to distinguish important releases from market noise. As a rule of thumb, economic and monetary data are market movers. The Federal Reserve’s minutes of the Federal Open Market Committee’s (FOMC) monthly meeting and major U.S. economic releases typically have the most significant impact on the forex market, as the U.S. dollar is the world’s reserve currency. USD has been on one side of 88% of forex trades as of April 2022.

Forex Market Movers Impacted by the News

The most important forex news impacting global exchange rates includes the following.

Monetary Policy Decisions by Major Central Banks

Central banks aim to influence a country’s currency to address economic fluctuations and improve overall economic activity. During periods of high inflation such as the second half of 2022, major central banks including the Fed and the European Central Bank (ECB) responded by raising benchmark interest rates.

As monetary policy directly impacts a country’s currency in circulation, it is the most prominent market mover in currency trading. During mid-December last year, the ECB raised interest rates by 50 basis points, causing EUR to gain 0.4% against the dollar following the announcement.

Macroeconomic Releases

Macroeconomic releases also have a major impact on the forex market, as it reflects an economy’s health at any given time. For example, the U.S. released its Consumer Price Index (CPI), Producers’ Price Index (PPI) and core inflation data for the month of December 2022 last week, which created significant selling pressure for the reserve currency. The nation’s retail monthly sales slumped 1.1% in December, 10 basis points higher than the forecasted 1% decline. Wholesale prices fell by 0.5%, beating the Dow Jones consensus estimate of a 0.1% decline.

Currency traders speculate that the slowing inflation rate might cause the Fed to slow its aggressive rate hike policies. Following the macroeconomic release, the U.S. Dollar Index hit its seven-month low at 102.07. Also, the EUR/USD currency pair reached its nine-month high following the data release.

Global Geopolitical Events

Geopolitics are prominent market movers in the forex market as they can impact trade relations between two countries. Several global geopolitical events upended currency trading last year.

The Russian ruble had a volatile year, as the legal tender hit its all-time low against the greenback in Feb 2022 before regaining momentum in the second half of the year. As the news of the Russia-Ukraine war broke out, the ruble plummeted by 10.45% intraday, causing the Central Bank of the Russian Federation to intervene in ruble-associated forex trades.

Using Market News to Drive Forex Trends

Keeping up with recent events is key to becoming a successful forex trader. Following the latest news releases by the G10 economies can be sufficient, as they make up the eight most-traded currency pairs in the forex market. These major currency pairs account for approximately 88% of all trades.

The currency market comes with risk, given its market size and volatility. Several forex trading strategies allow traders to capitalize on the price swings ahead of key news releases. Though currency traders often generate hefty profits by trading the news, beginners might get lost in the shuffle as keeping track of forex news and macroeconomic data can be challenging.

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