6 Forex News Events that Will Drive Up Market Volatility

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Trading the Forex News Events is slightly different than any other type of trading strategies. At the same time, Forex news event trading offers a great incentive to trade because of the potential to make a quick profit. The number one reason why news trading is such a lucrative business is because of the spike in volatility, which means more trading opportunities and bigger profits. Essentially, when we’re looking to trade the news sometimes it’s very clear cut, but other times it’s not really clear, especially when we take a look at the initial market reaction on these major event risks. Be sure to always check our Forex Calendar to know what’s ahead in the week.

It’s important to understand that news trading is not for everyone as some traders just can’t cope dealing in an environment where volatility suddenly skyrockets. Successfully trading the news requires some preparation and you have to do a lot of research before you even start trading the news. I actually like to take advantage of a lot of the volatility that comes after a lot of these news events and this article is an attempt to provide you with the best six Forex news events that will drive up market volatility. This risk event tends to have the greatest impact on the currency market as a whole.

1. Special Forex News Events like Brexit and US Election

The first step that you have to take is to track the market expectation for that particular risk event. We want to know what is the general consensus so we can know initially what to expect from the market. Trading big risk events such as Brexit or the US Election as we saw, had the potential to disrupt market volatility in a big way and cause real black swan events. In order to maximize the potential profit you have to be selective and want to focus on specific currency pairs that tend to show the best reaction.

In the case of Brexit, although choosing to trade the GBPUSD was still a good idea a better option would have been to trade a cross pair such as the GBPJPY which would have been hit from two front-ends: first, the Pound weakens due to the UK leaving the EU and secondly the risk aversion environment would be positive for the Japanese Yen.

Trading the USDMXN during the US Election probably would have been the most volatile trade out there, because the Mexican Peso was most likely to be the one currency to weaken the most against the US Dollar in case of a Donald Trump presidency.

As Donald Trump was making this acceptance speech, the market went absolutely wild. USD tanked against every pairing out there are it became apparent that Trump won. Fear set in but when Trump’s speech was about unity and that he stood for ALL Americans, USD turned around and rallied. What a turn in events… but this is to show you how crazy things can get when one of big Forex News events like this although the US election is on a recurring 4 year period.

2. The Unemployment Rate Announcement

The US unemployment rate coupled with the NFP figures are considered to be the most important economic developments that tend to have a big impact on market volatility. Between these two we’re still set with the decision of which one do we choose and in essence the one that we should be looking at is essentially the headline reading which is the change in the US NFP. We use as our example the August 2016 NFP reading, which missed market expectation, but the market didn’t react as it would have done in normal conditions. When a news event is released there is often a lot of irrational market movement.

3. Gross Domestic Product or GDP

The GDP figures are another Forex news event that tends to drive up market volatility. We want to track market expectation and we want to know how the data has performed over the last few months. Based on my own experience the Canadian Dollar tends to have the most accurate reaction to the Canadian GDP figures. We can notice an improvement in the GDP figures over the last months and since the market expectation also sees positive GDP growth each time we see positive GDP figures the Canadian Dollar strengthens.

4. Consumer Price Index or The CPI Index

In normal conditions, inflation is negatively correlated with the currency exchange rate. If inflation goes up, this means prices will go up and ultimately it means that the power of your money decreases over time and now you buy less with the same amount of money due to the uptick in inflation. It’s quite simple to showcase this when we have so many central banks around the world fighting inflation through the means of quantitative easing efforts.

Let’s take for example the ECB monetary policy to introduce QE in January 2015. The effect on the EUR exchange rate was quite dramatic and we can see that the expectation of higher inflation had a negative impact on EURUSD exchange rate.

5. FOMC Meeting Outcome

The FOMC meeting not only it drives FX volatility higher, but it can be the trigger for long lasting trends in the currency market. The FOMC determines the course of the US monetary policy and what we really want to do during the FOMC news is to wait for the news to happen and then assess whether the news is bullish or bearish for the US Dollar. What is important is to wait for the news to feed through and only trade after we had a real reaction. Take for example the April FOMC meeting and the USDJPY reaction. After a very dovish Fed that hinted that no rate hikes is to be expected the USDJPY started selling aggressively the following day reinforcing the prevailing bearish trend.

6. Central Bank Interest Rate Announcement

The currency market is driven by interest rates more than any other asset classes. Hence, it’s no surprise that CPI announcement is one of the more significant Forex News Events that cannot be ignored. This is a significant event that will drive prices up or down quickly. In this regard, Central Bank interest rate decisions are crucial in determining the perceived value of a currency. The general consensus is that higher interest rates are good for the currency market and lower interest rates are bad. With the recent Brexit event, we have the perfect example of how a currency reacts when a Central Bank like the BOE cuts interest rates. We have the perfect environment because of the overall negative GBP sentiment which resulted in a good short GBPUSD trading opportunity.

Last but not least, we have to keep in mind that when new events and major news announcement can trigger big price movement. If you are a volatility trader, then this kind of move you might welcome. However, if you are a grid strategy trader, it’s best to stay out of this kind of market. Trading Forex News Events or announcement can drive Forex volatility up so it’s best you know what you are doing before messing around these kind of markets.

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