How to Trade Forex News Events?

08 November 2023

Every major trading platform and Forex news website has an Economic calendar, which includes the list of all upcoming announcements.

So what is behind the basic Forex strategy for news trading? One of the most widespread ways to trade forex on news is as follows: as the latest economic data comes up, the traders try to classify them as ‘bullish’ or ‘bearish’ news for the given currency and then open positions accordingly.

For example on Tuesday, March 31st, 2020 the Eurostat was scheduled to release the latest Consumer Price Index for the Eurozone. In the previous month, it was at 1.2%. When the actual numbers came out, the annual inflation measure stood at 0.7%, even lower than the market expectation of 0.8%.

Then how can we interpret this news? Well, the ECB has a single mandate of price stability. They define this term as keeping the annual inflation below, but close to 2%. Already in February, CPI was well below target, but now it fell further to 0.7%. This news will give the ECB an incentive to keep QE running for a longer period and hold on to zero-rate policy for at least two years. This can potentially weaken EUR and therefore it is a piece of bearish news for the single currency.

This is just one example of how the news can be interpreted. In fact, there are at least 13 types of economic data releases, which usually lead to higher currency volatility, something we will discuss below in more detail.

Trading on News and Economic Releases

Here is the list of the some of the best news events to trade with Forex:

Consumer Price Index (CPI)
Home Sales
Manufacturing Purchasing Managers Index (PMI)
Gross Domestic Product (GDP)
Unemployment Rate
Consumer Confidence Index (CCI)
Non-Farm Payrolls (NFP)
Crude Oil Inventories
Initial Jobless Claims
Retail Sales
Interest Rate Decision
Trade Balance
Budget Balance

Let us discuss each of those in detail, exploring how those can be interpreted as ‘bullish’ or ‘bearish’ signs.

Consumer Price Index (CPI)

CPI measures the rate of the annual increase in the basket of goods and services in a given economy. It is published on a monthly basis. Considering that most of the Central banks around the world are actively targeting the inflation level, this type of announcement can have major implications on the Forex Market.

For example, the Bank of England aims at a 2% inflation rate. In fact, if this measure deviates from its target by more than 1%, then the Governor of this institution has to write an official letter to the UK Chancellor of the Exchequer. This document must explain the reasons for this variation and discuss the plans for reading this situation.

Therefore if the UK CPI falls well below 2%, this might indicate that the Bank of England will be more inclined to cut rates and consequently weaken the exchange rates of GBP.

Home Sales

This is the major indicator of the health of the Real Estate market, published every month. The steady high rate increases in home sales can be a positive sign for the performance of the housing sector in a given country. This can also support the exchange rate of the national currency.

Manufacturing Purchasing Managers Index (PMI)

The Institute of Supply Management (ISM) publishes PMI on a monthly basis. This measure surveys top-level executives in more than 400 companies and mostly focuses on the economic trends in the manufacturing sector.

The index is measured by the number from 0 to 100, with 50 being the level of the previous month. So if the PMI is above 50 then this will represent an expansion and anything below 50 will be a sign of contraction.

Expanding the manufacturing sector can help currencies to appreciate, especially when it comes to export-oriented economies, like Germany, South Korea, China, and Japan.

Gross Domestic Product (GDP)

This measures the annual growth rate of the Gross Domestic Product and is expressed as a percentage. It is published on a quarterly basis. By many traders and investors, for developed countries 3% or higher growth rate is considered a solid indicator.

If the country’s GDP growth number turns negative for two or more consecutive quarters, then the economy is considered in a recession. This can put the currency in question under significant selling pressure.

Unemployment Rate

Another major monthly economic indicator, which shows the percentage of unemployed people from the labor force, looking for work. Most central banks do not target this indicator. One exception to this is the Federal Reserve, which is aiming at 5% or lower level.

Therefore, it is worth keeping in mind that USD might be more receptive to changes in the unemployment rate, then EUR, JPY, and other currencies.

Consumer Confidence Index (CCI)

Published monthly by the Conference Board, the Consumer Confidence Index is constructed using the date from surveying 5,000 US households regarding their opinions on business, unemployment and personal financial conditions.

It is widely believed that if the consumers are more confident about the economy, they will be likely to spend more money on goods and services. This can also help the currency to appreciate.

Non-Farm Payrolls (NFP)

This measures the total number of paid employees in most sectors of the economy in a given month. As the name suggests, this measure excludes workers from agriculture. Also, NFP does not include government and non-profit organizations employees.

Rising payrolls are usually a good sign for the economy and can support USD against its peers.

Crude Oil Inventories

Published by the US Energy Information Administrations, the Crude Oil Inventories provide information on US Oil stocks. This measure is updated every single week. The price of every single good is determined by the supply and demand. Therefore, Crude Oil Inventories provide us with the latest picture in the first category.

Without any major changes from the demand side of the equation, the expanding supply can put pressure on Oil prices and also on currencies like CAD and RUB.

Initial Jobless Claims

Weekly reports of this measure are published by the US Department of Labor. This shows the number of people claiming the unemployment benefits for the first time. Expanding the number of jobless claims is generally considered as a poor sign for the economy and consequently can put selling pressure on a given currency.

Retail Sales

This is yet another monthly measure of Consumer Confidence, however unlike in the previous case, it is not based on household opinions, but their behavior. Rising retail sales is considered as one of the signs of a healthy economy and can support the exchange rate of the currency.

Interest Rate Decision

Most Central Banks schedule 8 monetary policy meetings per year. Not only their decisions but also statements at the press conference can have a major impact on Forex Market.

Rising interest rates give investors an opportunity to earn higher returns on their deposits, CDs, and other fixed-income investments. This makes the local currency more attractive to market participants.

Trade Balance

This measures the balance between the total number of exports and imports the country has with the rest of the world. This is also one of the four main components of the GDP.
The positive trade balance helps the currency in two ways: Firstly, as part of the Gross Domestic Product, it can increase the rate of economic growth.

At the same time, it is worthwhile to keep in mind that for foreigners to purchase goods and services from any given country, they have to convert their money to local currency. This creates a natural demand for the latter, which can improve the exchange rates.

Budget Balance

This shows the difference between government revenues and expenses. The majority of countries operate with deficit spending. There are some exceptions to this: some developed countries, like the US, UK, and Germany having positive budget balances for some periods. Norway can be considered a rare exception, as it is running a massive budget surplus for many years now.

For example, the EU guideline urges the member states of the Eurozone to keep the budget deficit lower than 3% of GDP. As the last European Sovereign Debt Crisis has shown, if the deficit spending gets out of control, this can eventually threaten the solvency of the country and can easily lead to significant monetary devaluations.
On the other hand, looking at past history of exchange rates, a budget surplus can certainly help the currency to appreciate. One of the best years of USD’s performance, was the period between 1998-2001 when the revenues of the Federal government was actually higher than its expenses.

How to Trade Forex News Releases - Key Takeaways

There are two things to consider when analyzing any major economic data release: how the latest number compares with the previous one and even more importantly, how it lines up with the current market expectations.

In most cases, during the major economic announcements, the volatility of given currency increases and can sometimes lead to trend reversals, especially if it misses or exceeds the market expectations.

Not all types of economic news are quantifiable, statements of the chairmen of the central banks or finance ministers, or other important officials can also have a major impact on currency movements.

FAQ: Trading the News

Why do some currencies not fall in the rate cut announcement?

Actually, this is a very common occurrence in Forex, to the extent that it gave birth to saying: ‘Buy the rumor, sell the fact’. The Market reaction to a news release is not always predictable.

Most of the traders are always looking for clues for the direction of future interest rates. They analyze other economic indicators, statements coming out of the Central banks and governments. Therefore, very often the upcoming rate cut, for example, is already priced in at the time of the announcement. Then the actual decision itself makes very little difference for the currency pair.

In what ways HICP is different from other Consumer Price Index measures?

The European Central Bank uses the Harmonized Index of Consumer Prices as its primary measure of inflation. It is published by Eurostat on a monthly basis. Its methodology has been harmonized across the Eurozone countries, in order to make this measure more objective and accurate.

HICP differs from the US Consumer Price Index in two ways. Firstly, unlike the American CPI, which focuses only on the prices for Urban Consumers, the European Index includes the basket of goods from the rural regions as well. Also, HICP considers owner-occupied homes as investments and therefore does not include them in this inflation measure.

Are key news releases always useful for long term trading?

Both short and long term trading can be based on news releases. However, for the large time horizon, the effects of the major economic announcements can be mitigated by other factors, such as Purchasing Power Parity and other forces.

One example of this is the performance of USD/CHF for the last 20 years. After reaching a key interest rate of 3.5% in 2000, the Swiss National Bank started cutting rates regularly, eventually going as low as -0.75%. Essentially, because of the policies of SNB, the depositors in Swiss banks are charged for the privilege of holding CHF accounts.

According to basic logic, the value of the Swiss Franc should have declined tremendously because of those decisions. So let us take a look at the real performance of this currency:

As we can see from the chart above, at the beginning of 2000, USD/CHF traded at 1.60. From the following years, ignoring policies of SNB the Franc appreciated steadily, eventually surpassing the parity with the dollar. By the end of March 2020, one Franc is worth a dollar and 3 cents.

So how can we explain this? Here is when the Purchasing Power Parity comes into play. The Swiss Franc has had near-zero inflation rates for decades. After 2008 it has even experienced some deflationary periods. At the same time, the historical average of US CPI stands near 3%.

This type of contrast might not make much difference for one or two years; however, when this process goes on for decades, then inflation differentials start to accumulate and have a major influence on currency pairs.

According to the CPI calculator on the US Bureau of Labor and Statistics website, in February 2020, a consumer needs $122.55 to maintain the same buying power as with $100 in January 2008. According to the Swiss government data, during the same period, the cumulative inflation of CHF is 0.7%. So just in a 12 year period, the Swiss Franc gained more than 21% against the dollar in Purchasing Power terms.

Despite the policies of the Swiss National Bank, these PPP factors always put pressure on CHF to appreciate.

There is one more thing to keep in mind. The negative interest rates of SNP have one major limitation: people can ignore it. Even if the local central bank further reduces rates to -1% or -1.5%, it might make very little difference.

Let us keep in mind that you do not have to open an account in the Swiss Bank and pay for the privilege of holding Francs. People can open a 0% deposit savings account in CHF, in their country of residence, or alternatively just keep some Franc banknotes in their safes. So, it is virtually impossible and unrealistic to enforce negative interest rates on savers.

How traders can utilize One-Cancel-All orders during the major announcements?

The One Cancel All is a package of 2 limit orders in trading stocks, options, or other securities. The most intriguing part about this is that if one order is triggered, then the other is canceled.

Suppose, that there is an upcoming major economic announcement, say the interest rate decision from the Reserve Bank of Australia. The trader can place an OCO order on two pairs: Long AUD/USD and short XAU/USD.

In this way, the trader is likely to make money in both scenarios. If RBA hikes rates, then the AUD/USD order will be executed and the one with shorting Gold, will be closed. If the Reserve Bank of Australia disappoints, collapsing AUD, then a stronger dollar might put pressure on the price of above mentioned precious metal. In this case, the short XAU/USD will be opened and AUD/USD canceled.

One Cancel All orders can also be helpful in a sense, that it removes human emotions from the picture and promotes more disciplined trades.

Are the currency pairs always less volatile, when the actual data matches the market expectations?

Many Forex trading platforms and financial news websites provide customers with estimates of market expectations for each major economic news release. Therefore in theory, if the actual number matches the forecast, then this should already be priced in and make little difference.

However, there is no sure way to get a 100% accurate reading of market expectations and any estimate can be subjective or inaccurate. Therefore we can frequently see the cases, where even in the above-mentioned scenario, markets can be very volatile.