How does news affect the Forex markets?

Global financial markets are interconnected and depend heavily on financial and macroeconomic statistics. The forex market is no exception. Exchange rates – the necessary instruments of the forex market – are affected by critical financial news, fundamental data, and important political events. But nothing compares to seeing the real effects of story on the forex market. Here are three notable examples of such influence.

Monetary Actions

News such as monetary policy decisions by the world’s major central banks has an immediate impact on currency pairs. If the interest rate changes too quickly or too slowly, or an unexpected comment is made about future interest rate changes, the affected currency pairs rise or fall at the speed of light. When the Federal Open Market Committee (FOMC) of the U.S. Federal Reserve announced its first-rate cut from 5.25% to 4.75% on September 18, 2007, after a long series of rate hikes, it drove the EUR/USD higher. On the hourly chart of the EUR/USD below, one can see a jump in the price as the dollar lost some of its appeals at a lower rate, and the euro rose. The reaction has been immediate, and a strong uptrend has followed:

Macroeconomic Data Publications

Another necessary type of Forex news that has a substantial and immediate impact on exchange rates is macroeconomic data and reports. One of the most notable effects can be seen in the release of quarterly US GDP data. If the reported quarterly variation differs from the expected value or merely is far above/below the previous quarter, the foreign exchange market reacts with unpredictable fluctuations. When the Office of Economic Analysis (U.S. Department of Commerce) released its Q2 2008 GDP advance on July 31, 2008, we had a strong rally on all dollar related pairs. The reported change was +1.9%, below the expected value of +2.3%. The chart shows the EUR/USD hourly price movement with a substantial spike as a candle exactly after the GDP report was released:

Geopolitical Events

Some global geopolitical events have considerable influence on the forex market. Wars, political scandals, elections, peace treaties, nuclear bomb tests, and terrorist attacks often lead to many consequences and expectations regarding these consequences. And exchange rates respond to these kinds of events with fluctuations that end up putting an end to old trends and adjusting to new ones in the long run. The September 11 attacks on the United States were a major global event of unprecedented geopolitical consequences – the war in Afghanistan and Iraq increased U.S. war budget spending and a higher U.S. fiscal deficit. As can be seen in the monthly EUR/USD chart below, September was one of the critical points in the reversal of the downward trend to the upward. The dollar has been falling ever since:
As you can see, the impact of news on the Forex market cannot be ignored. Whether you are a day trader or a long term trader, your currency positions will be affected by the Forex news. That’s why forex traders need to follow all related news and make their decisions about it.

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