One of the reasons traders favor the FX market over other assets and commodities is the high liquidity displayed by the currency market. Also, since all that traders need to access this market is an internet connection, trading FX is often a global affair.
Moreover, because of its international reach, the FX scene is greatly affected by the goings-on across the world. These global events usually follow news releases that give a bigger picture of what is happening. When you want to trade forex on news releases, get ready for an exhilarating experience.
Global events trigger volatile market conditions. Such volatility is often trailed price jumps which traders then capitalize on making a profit. The main item of interest in the FX scene is a country’s currency which is usually pegged to its economic performance.
Therefore, as news releases occur, expect shifts in the market. As a trader, you should be ready to capitalize on the changing market to make money.
This article will explain the ins and outs of news releases and what they mean to the forex trading world. Also, read on and find out how you can also capitalize on global events through news releases while trading.
News Releases Focus On Specific Currencies
A couple of currencies dominates the forex market. These commonly traded currency pairs frequently show the highest volatility. Price changes observed are numerous and traders have a lot of money-making opportunities.
Therefore, a lot of global events have an impact on the values of these major currencies. As a trader looking to exploit news releases focus on updates concerning these critical currencies. The common currencies are:
- USD
- EUR
- GBP
- JPY
- CHF
- CAD
- AUD
When it comes to pairing up these currencies, the most liquid combinations are always tied to the Dollar. Being a major global economy, it is not hard to see how any major event would have an impact on the American economy.
Nevertheless, as globalization ramps up its influence across borders, global events similarly affect different world economies. One standout scenario is the Brexit debacle. While on the surface, a lot would assume that the UK opting out of the EU would primarily affect its economy.
Economic studies indicate that the UK will fare rather poorly out of the European economic block as opposed to remaining inside it.
The country would be unable to access the free market which EU member states have access to, and hence, its citizens will not be selling their goods and services there. Also, job losses from British citizens working abroad will likely diminish owing to tighter cross-border movement restrictions.
While Brexit is mostly a British affair, its influence is felt 3000 miles away in New York. A day after the Brexit vote saw a drop in the values of both EUR and USD. On the other hand, the USD surged.
While an appreciation in the value of a currency points to a robust economy, it makes purchasing them difficult, mainly owing to their higher price. Additionally, US exports to the UK surge in price and many people would rather forego them.
News Releases And Economic Indicators
News releases are mainly triggered by significant events that influence the major economies. Therefore, a lot of releaseS are centered on the health of an economy. There are various economic indicators that can help you to tell the status of the country.
These economic indicators are what traders watch out for to get a bearing on market performance. Market performance influences trading by altering the values of different currencies and creating trading opportunities. These are some of the economic markers you need to be aware of:
· GDP
It is the most widely used indicator of a country’s macroeconomic status. All countries across the world use GDP as a way to measure their economic strength except for the Kingdom of Bhutan. In short, any news release that touches on GDP will bring along significant changes in the market environment.
· Consumer spending
Consumers run the economy by fueling purchases and sales alike. The purchasing power of any citizenry goes a long way in determining the economic strength of their country.
Consumer spending usually defines how much money people spend on buying goods and services. These items of interest to consumers range from durable items like appliances to short-term items such as gasoline, food, clothes etc.
Consumer spending is a good indicator of an economy’s strength. This is primarily because of how consumer spending tends to drive demand and supply of certain commodities. As disposable income increases, people’s need for goods similarly goes up and manufacturers are compelled to supply more products. Failure to do so leads to higher prices and ultimately inflation sets in.
In the US, it is the primary force behind the country’s superior economic disposition. So if you want to know how where the US economy ranks, then check out data that shows what people are buying and what they aren’t.
Following consumer spending news releases should help you identify trends in the market. This should ultimately give you plenty of information with which to you can use to make critical trading decisions
· Inflation
Rising inflation results from a sustained increase in the general prices of commodities in an economy. As the cost of goods goes up, people’s ability to afford them drops and with it consumer spending.
As people aren’t spending money in the economy, investors tend to experience heightened uncertainty and hence a reduction in investments.
When it comes to forex trading, heightened inflation gradually causes the respective currency to depreciate in the long-term. This is because trading in such an economy holds no benefit to investors.
Moreover, economic growth slows down because of the uncertainty displayed by potential investors. On the other hand, rapid inflation may arise from fast economic growth. But if interest rates are not favorable, then economic growth hits a speed bump. So watch out for news releases that point to either a rise or drop in inflation levels.
· Employment statistics
This data provides a pretty good picture of the employment status of a country’s population. The rate of unemployment, for instance, is a crucial factor when it comes to trading FX. A rising rate points to a diminishing currency value. On the flip side, higher employment figures point to a strong economy and a currency whose value is on the rise.
· Industrialization
Rapid industrialization is a blessing to any economy. Workers in these countries often experience a boost in their earnings, mainly due to the availability of jobs. Therefore, they have more disposable income and are likely to invest some of that extra cash.
There is a wealth of benefits that can be drawn from a countries ability to industrialize, and as investors, it offers profitable moves.
Events That Lead To News Releases
The forex scene hardly remains inactive as millions of traders across the globe attempt to eke a profit trading currencies. As such, any major global event usually has a significant impact on the FX market. Here are some critical events whose influence can be seen all over the FX arena.
· Elections
Elections are a common occurrence in just about every country in the world. After a set period, the citizens of a country gather to select who will lead them in the following years. Whoever wins will most likely impact future investment prospects into that country.
Political parties whose manifesto promises economic growth and development tends to attract investors and further boost the nation’s currency value. On the other hand, if the incumbent gravitates towards pro-economic policies and is on the brink of losing out, investors will generally cower from the market. Currency drops due to this insecurity about the future.
Political equations carry a lot of emotional baggage and further increase the market’s uncertainty. Also, political instability is not a rare occurrence, and these two often raise volatility levels. Whichever side you may lie on the trading divide, heightened volatility presents new opportunities to make money.
· Wars and conflict
Physical wars are often distressing to the economy and the citizenry at large. War damages just about anything in a country. Losses may result from destroyed infrastructure like roads and bridges. Ultimately, the broader economy suffers. Loss of lives only compounds this problem.
After wars have been fought, countries must rebuild. Usually, this process if financed via low-cost credit. Inevitably, the war-ravaged nation’s currency loses value over this dependency. The cost of rebuilding will, in the end, be paid for indirectly by the country’s economic wellbeing.
On the other hand, wars have the potential to stimulate economic growth throughout the manufacturing sector. Conflict draws significant resources from the economy and if a country is capable, then they will be able to meet the cost weapons and other items needed on the battlefield.
One famous example is the US during WW2. The nation was in the midst of the Great Depression when the Axis powers landed on Pearl Harbor. After this, the American war effort was kicked into high gear, and this saw the rise of a manufacturing industry like no other which ultimately paid off in victory.
· Natural disasters
These are often unpredictable and carry devastating effects on the economy of the affected country. Earthquakes, floods and tsunamis do not just impact the economy but also the driving force behind it.
Natural disasters have the potential to undo several years’ worth of economic development in an instant. For institutions with tangible assets like office buildings, the loss encountered is tremendous and these entities usually close shop.
Besides the damage to infrastructure, the cost of cleaning up after a natural disaster such as an earthquake is monumental. Usually, and unlike wars, natural disasters do not have a positive outcome and any economic gains are lost in a brief moment of Mother Nature’s wrath.
Trading The News
Once you have a clear picture of which events impact the economy, you then have to figure out how to apply this knowledge on the trading floor. While there is no foolproof way to trade news releases, two methods stand out from the rest: Directional and non-directional bias.
· Directional Bias
When it comes to directional bias, you usually hold the belief that a market will follow a particular trend following a news release. You need to know what item in the news release will cause the market to shift. Prior to these releases, analysts often arrive at a consensus on how the economy is projected to behave.
Once the news is out, the actual figure and the consensus from the prior analysis have a role to play when trading.
Successful traders live by the mantra, ‘Buy the rumor and sell the news.’ This means that before news releases, these guys have already secured positions in the market and once the news is out, they then sell their position to those who waited for the news release.
Traders often have to be keen on the consensus versus actual figures reported. The harmonized assumption may give you a general direction and possibly a head start.
· Non-directional bias
As opposes to directional bias, this approach doesn’t follow any direction until the actual news is out. For traders using this method, the preliminary course of the market following any event is insignificant. It is only until the news is out that traders begin to make moves in the market.
However, they know that once a significant event takes place, the market will similarly react with an equally substantial move.
Patience is critical since you will have to await the result to decide on the direction of your trade. This method lags behind directional bias and sometimes you may be late to the party. However, you will be confident of your move since the news is already out in the open.
Finally, trading news is not just about waiting for significant events before getting into the market. On the contrary, you need a broad understanding of how global markets work and react to significant events and calamities. This way, you will be in a position to predict the outcome of any news release.