How Forex News Affects Forex Volatility

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Forex News and its Effects to Forex Volatility

With its almost six trillion dollars daily turnover, the Forex market depends on Forex news to move. For this reason, Forex volatility and Forex news enjoy a direct relationship.

Most of Forex news comes from the economic sphere. Job-related data, changes in the size of an economy, inflation, etc., offer traders clues about the economic performance of a region or country.

Traders put the economic news together to find out the shape of an economy. Thus, the shape of a currency.

But, Forex trading means buying and selling currency pairs. Hence, traders compare to economies for every currency pair.

It doesn’t mean Forex traders need an economic background. Merely, it means looking at the major economies around the world, like:

  • United States of America
  • Eurozone
  • Japan
  • Australia
  • Canada
  • United Kingdom
  • Switzerland, etc.

Now imagine that each economy has a currency:

  • S. Dollar (USD)
  • Euro (EUR)
  • Yen (JPY)
  • Australian Dollar (AUD)
  • Canadian Dollar (CAD)
  • British Pound (GBP)
  • Swiss Franc (CHF)

Forex News Feed

If you combine the currencies two by two, you have the main currency pairs to trade. Hence, Forex news from those economies will increase Forex volatility.

In this article, we’ll cover various aspects related to Forex market news, such as:

  • Forex news that moves the USD
  • What Forex news matter for the EUR and other currencies
  • Forex volatility in different trading sessions
  • Daily Forex news to watch
  • How to interpret the Forex news calendar

Forex News

Forex News that Moves the USD

Any discussion about Forex volatility and what causes it starts with the USD. As the world’s reserve currency, it influences the entire Forex dashboard like no other currency.

Because of the dollar, the currency pairs form two categories: majors and crosses. Any major pair has the USD in its componence. Hence, a major don’t.

Only by splitting the pairs in such a simple manner, traders can avoid Forex volatility surrounding critical economic events. For example, one way to prevent wild swings in the trading account is to trade cross pairs during American Forex news.

After the Bretton Woods conference, the USD became the pillar of the world’s financial system. Moreover, the Nixon shock in 1970’s decoupled it from the gold standard.

From that moment, it was only a matter of trust in the USD that kept foreign investors buying it.

Nowadays, the USD is still the preferred choice when nations build foreign exchange reserves. This is an enormous privilege the USD enjoys, and other countries envy the USD status.

Most Relevant US Forex Trading News

The Forex calendar news out of the United States is one of the busiest of them all. Because of the dollar’s role, every market depends on the shape of the US economy.

Moreover, the Intermarket correlation means the dollar will move not only the Forex market but also other markets like bonds, stocks, options, and so on. Hence, it is all about interpreting the economic news.

For a currency, it is all about the interest rate level. Hence, the Federal Reserve interest rate announcement and press conferences move the dollar. And, the Forex market.

The Fed meets every six weeks. On a Wednesday, right after the London’s close, the Fed releases the FOMC (Federal Open Market Committee) Statement.

This is a text describing the monetary policy. Trading algorithms or robots scan the document with lightspeed and react.

Quant firms and HFT (High-Frequency Trading) algorithms buy and sell based on differences between the previous FOMC text. Sometimes, even no change, is a signal for buying or selling.

Forex News Calendar

Once a quarter, or every two sessions, a press conference follows the FOMC statement. Never has the Fed hiked or cut the federal funds rate without a press conference to follow.

Therefore, the federal funds interest rate level is THE Forex news to watch. As a rule of thumb, the higher the interest rate goes, the stronger the dollar becomes.

The Forex market volatility increases tremendously during the Fed presser. Press representatives from around the world ask questions. And, the Chairman/Chairwoman answers.

No one knows the questions. And, no one knows what the answer will be too.

As such, the USD makes large swings all over the charts. Effectively, it trips stops both for longs and for shorts.

CPI or Inflation to Mark in the Forex Calendar News

Inflation shows the change in the price of goods and services over a period of time. Typically, the inflation or Consumer Price Index (CPI) comes out monthly.

It is one of the closely watched Forex news. The market reaches extreme Forex volatility levels if the CPI deviates from the target.

Traders know the Fed closely watches inflation. Part of its mandate, the Fed targets a two percent level for the CPI.

However, it doesn’t look at the regular CPI. Instead, it considers the Core CPI. Or, inflation without transportation, energy and food costs.

The standard interpretation is that when inflation falls, the currency depreciates. How come?

When inflation is in the fall, expectations grow that the Fed will ease the monetary policy. Or, it’ll cut rates.

Because there’s a lag between the two Forex news, traders react on the spot. After all, trading is a game of expectations. Right?

As a Forex volatility indicator, inflation doesn’t “damage” the charts as when the Fed changes the rates. However, if deviates strongly, the Forex volatility spikes as traders bet the Fed will react.

Forex News Trading – Jobs Data

The other side of the Fed’s mandate refers to jobs. Fed vows to create jobs. Thus, it’ll change the federal funds rate level accordingly.

As such, jobs-related data like:

  • NFP – Non-Farm Payrolls
  • ADP – private payrolls
  • Jobless claims
  • The unemployment rate, etc. are Forex volatility news to mark in the economic calendar.

There is a direct relationship between job creation and the USD reaction. Hence, when the U.S. economy creates more jobs than expected, the USD rises. And, the opposite happens when it doesn’t.

Out of all jobs data, the NFP is a great Forex volatility indicator. Released every first Friday of any month, the market keeps a tight range.

Forex Trading News

Moreover, the Forex market prepares in advance for the NFP reading. Sometimes, for more than a week.

But the Forex volatility surrounding the release doesn’t depend only on the actual NFP number. Instead, most of the times the labor department releases revisions for previous data.

Sometimes, those revisions dwarf the current NFP Forex news. As such, the initial market reaction may dissipate quickly when revisions exist.

Another Forex News that Matters for the USD

Throughout the six weeks between two Fed meetings, the Forex news feed is full of economic releases. They come from all areas:

  • Services
  • Manufacturing
  • Construction

The three sectors make the GDP (Gross Domestic Product) and help estimate the size of it. Or, the size of economic expansion or contraction.

Based on the data in each sector, traders estimate the economic evolution. And, its impact on the Fed’s interest rate decision.

Again, because there’s plenty of time between the economic releases, traders will respond on the spot. They’ll prepare for the Fed statement and decision by selling or buying the USD in advance.

Out of the three sectors, the services data creates the most Forex volatility. Obviously, the reason is the U.S. economy is a service-based one.

Or, the services sector sits at the core of the U.S. economy. When the pillar suffers, the contagion spreads rapidly.

Forex news to watch from the three sectors:

  • ISM Manufacturing and Non-Manufacturing
    • a survey showing the state of the manufacturing and services sector
  • Retail Sales
    • shows the consumer’s health
  • Average Hourly Earnings
    • an early indication for inflation’s evolution
  • Personal Spending and Personal Income
    • shows the disposable income’s evolution
  • Existing Homes Sales
    • shows the health of the housing sector
  • Building Permits
    • helps to estimate the future projects in the housing sector

These are only some of the Forex news to consider. While second-tier data, the market reacts sending the Forex volatility to extreme levels if the actual differs from the forecast.

Forex Volatility Created by another Forex News in the World

While everything in Forex trading depends on the USD, some other news around the world makes the currency market moving. Keep in mind that a currency’s value depends on the counterpart currency.

For example, if you say that the USD is 1.27, that’s irrelevant. A correct statement says the USD is worth 1.27 CAD. As such, there’s another currency to judge.

Hence, another economy to interpret. When Forex news out of Canada comes out, the CAD may strengthen.

As a reaction, the USDCAD tumbles, without the USD having anything to do with it. Just that the valuation changed.

European Forex News to Consider

The Eurozone economies form the second largest economic block in the world. Thus, the Euro’s role in creating Forex volatility shouldn’t be ignored.

Despite the general belief, in Europe only a few events matter:

  • European Central Bank (ECB) interest rate decision and press conference
    • every six weeks the ECB announces the interest rate level and holds a press conference after each meeting
  • inflation
    • released monthly, it holds the key for the future ECB moves
  • PMI’s (Purchasing Managers Index)
    • a survey, the equivalent of the ISM in the United States

The Forex volatility surrounding the ECB reaches extreme levels. Sometimes, without the ECB President saying nothing new, the market shoots higher or lower, breaking essential levels.

The United Kingdom and Australian Economic Data

Even though the two economies are far away from one another, there are many similarities between the two. One, for example, is the fact that back in time the Australian Dollar was, in fact, the Australian Pound.

Forex Volatility

Besides the two central banks’ meetings (Bank of England and Reserve Bank of Australia), the two currencies react to:

  • PMI data
  • Jobs data

Both Australia and the U.K. release the PMI Construction, analyzing the construction sector carefully.

The Pound and the Aussie Dollar are popular currencies. Regarding Forex volatility, the GBP pairs reach extreme levels easier than Aussie pairs.

As a particularity, the AUD is a commodity currency. Hence, anything from the gold and other precious metals news makes the AUD moving.

Different Economies to Watch Too

Japan faces a terrible crisis. For decades, there’s no inflation.

Because of the aging population and cultural problems (e.g., difficult to immigrate to Japan), Japan is a closed society.

It makes it difficult to rely on external sources. All progress must come from within.

Bank of Japan was the first central bank to tap uncharted territory in monetary policy. It bought Japanese government bonds of unprecedented size, and in vain.

Two events from Japan create Forex volatility:

  • Bank of Japan (BOJ) monetary policy shifts
  • Tankan report.

The later is a comprehensive report about the entire Japanese economy. When gloomy, the JPY tanks.

SNB and Forex Volatility

The Swiss National Bank (SNB) made Forex volatility charts experience new levels. In 2015, the SNB dropped the EURCHF peg.

For years, the bank held the cross at an artificial rate. It promised to buy and maintain the level, no matter what.

However, 2015 proved too tricky. The ECB prepared to launch its quantitative easing, making it impossible for the SNB to hold the peg.

Faced with massive losses, the SNB gave up and lost tens of billions on the move. As history tells us now, it recovered all the losses and some more.

But, in those days, the SNB action created mayhem on the currency market. This is just another proof that Forex news doesn’t have to come from the Forex news calendar. Instead, a groundbreaking decision changes everything.

Forex Volatility in Different Trading Sessions

Forex trading goes around the sun. It starts with Asia, Europe, and ends in America. Rinse and repeat.

The biggest financial center in the world, London, takes the central stage. Now that Brexit became a reality, things may change. However, the London sessions stand out as the one where Forex volatility is on the rise.

Next, the United States session follows. Because there are some hours where trading goes on both sessions, Forex volatility is at its peak.

That’s especially true at the so-called fixing times when the clearing houses buy and sell and most of the options expire.

After the fixing and London close, the North American session loses steam. That is, if no Forex news comes later, like the Fed interest rate decision or the FOMC Minutes.

Daily Forex News to Watch

The term Forex news doesn’t refer only to economic news. Instead, it consists of all news with the potential to influence the currency market.

Therefore, the Forex calendar news contains other events like:

  • Central bankers’ speeches
  • Fed Chair semi-annual testimony in front of the U.S Senate
  • ECB President’s testimony in front of the European Parliament
  • Presidential elections, referendums, etc.
  • Political summits

They all move markets, together with the news that come from unexpected places like:

  • Natural catastrophes
  • Wars
  • Economic wars (g., imposing tariffs)
  • Geopolitical events
  • G7, G20 meetings, etc.

As probably is obvious, Forex volatility depends on more than the classic economic events. You’ll never know what happens next, and how the markets will react to it.

Perhaps this is one of the reasons why so many retail traders find this market so attractive.

Conclusion

The Forex market is like an entity that changes continuously. In a way, it is only reasonable.

Almost a decade ago, the execution of a trading order took longer than today. Even the trading accounts for the retail trader were different.

To have an idea, the spread for the most popular pair, the EURUSD, had three pips. Three full pips!

Nowadays, event 0.2 or 0.3 exists. Thus, it means the market changed together with new technologies.

Forex volatility changed too. It is hard to tell if for the worse or for, the better.

When Forex volatility is on the rise, retail traders blame the High-Frequency Trading (HFT) industry. The robots are responsible! What can we do?

When volatility misses, whose to blame? You guessed: still, the HFT industry, as the super-computers buy and sell so fast as levels barely move. There’s always supply and demand of almost equal sizes.

Forex news is a big driver for volatility too. As explained here, only the prospect of a bit economic decision is enough to make markets still.

Forex traders should be prepared for anything. Despite having a stop loss in place, there’s no total protection for a trading account.

Macroeconomic trends became so crucial that currencies react the first to changes. News from parts of the world far away (e.g., North Korea launching missiles) make markets tremble.

First, the stock market reacts. If the news is negative, it’ll tumble.

Second, when the stock market closes, the futures market takes it from there. And so on.

Like a snowball, it’ll roll over, and the effect appears on the Forex market too. First, the JPY, and then the other risk on/risk off pairs.

To sum up, every piece of economic, political, etc. data, is Forex news. Because high-impact Forex news leads to higher Forex volatility levels, it is part of a trader’s job to trade the news too.

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Damyan Diamandiev
Damyan Diamandiev

Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university.

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