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News releases influence price action significantly in the forex market. This is because they paint a picture of how an economy is doing or expected to perform in the future, influencing traders' sentiments towards a currency pair. While looking to trade based on news releases, it is vital to pay attention to major economic data releases, speeches from government and central bank officials, and geopolitical developments. The outcome of these releases reflects the strength of the given economy and may indicate the future direction of the currency.
The eight major currencies from the eight most followed countries are the best to trade for anyone looking to take advantage of news releases in the forex market. The currencies stand out partly because there is usually a consistent stream of reliable information from the countries that one can use to analyze and gauge the strength of the official currencies.
In addition, seven or more crucial economic releases each week affect the price action of the major currencies. Therefore, the best currency pairs to trade based on economic and news releases are EUR/USD, GBP/USD, USD/JPY, AUDUSD, NZDUSD, USDCHF, and CADUSD.
One can always trade any currency pair based on the economic release likely to send shockwaves in the market. Nevertheless, the US economic releases tend to have the most impact on the forex market, which makes major currency pairs the best for anyone looking to take advantage of heightened volatility.
Economic releases shape sentiments; thus, price action in the forex market hits the wires or web at different times. While geopolitical and other news that influence traders' sentiments can occur at any time, economic data get released at specific and scheduled days and times.
The time varies depending on when the market in the respective countries is opened. The best time to watch economic releases likely to shape currency pairs' price action.
When looking to trade based on news releases, it is crucial to know when the releases are expected in advance, focusing on the exact time. While there are varying economic data releases every day, it is essential to know to which data most market participants will place their attention.
Interest rate decisions by central banks is one of the key economic releases that sways sentiments and price action in the forex market. In some cases, rate hikes tend to trigger currency strength, while cuts signal weak in the economy, triggering currency weakness.
Retail sales are another important economic data to watch closely as it paints an accurate picture of spending patterns in the economy. Better-than-expected retail sales data often triggers currency strength. Inflation data in the form of consumer price data and producer price influences central banks' interest rate policies.
An unbearable inflation surge often forces the central banks to hike interest rates to try and reduce money in circulation. Employment and unemployment data is another important economic data to watch closely as it affirms the state of the underlying economy.
Other economic releases likely to influence price action in the forex market include Industrial production data and trade balance, manufacturing sector surveys, and consumer confidence surveys.
There are two probable outcomes whenever news hits; Price can spike in one direction or remain intact without any significant movement. Therefore, knowing the two probable outcomes, there are two possible approaches to trading the news.
Having directional bias means expecting the market to move in a particular direction depending on the news outcome or economic releases. For instance, one can enter a short position on the EURUSD pair if the Non-Farm Payroll Report comes better than expected, signaling strength in the US economy, therefore, dollar strength.
Similarly, if the Non-Farm Payroll Report was to miss expectations signaling weakness in the US labor market, one can look to go long the EURUSD to try and profit from dollar weakness after the report.
With no direction bias, one does not plan what to do based on the outcome of the economic release. In this case, one is only interested in seeing the direction the market will move after the news release before opening trade, as there is no bias as to whether the price will go up or down.
Consequently, a trader will only enter a long position when the market interprets the news and starts moving up. Similarly, once the data is interpreted, one would enter a short position as soon as the price begins moving lower.
The breakout strategy is the most popular strategy traders use to trade based on news releases in the market. In the run-up to a significant economic release, there is usually a form of consolidation in the market. As a result, the price tends to move in a tight range, struggling to make new highs or lows.
The balance that comes into play during the consolidation signals key market participants await the news release. Seconds after the release, there are usually wild swings in the market, with prices struggling to break out of the range.
Nevertheless, a few minutes afterward, a new trend often emerges as the price breaks out of the range and starts moving in a new direction away from the range.
The chart below shows EURUSD, which consolidated ahead of the Non-Farm payroll release.
Once the NFP came in better than expected at 227K vs. 209K expected its signaled strength in the US labor market, all but fueling dollar strength. The dollar strengthening against the Euro followed, fueling a slide in the EURUSD pair.
Any trader who placed a short position below the trading range during consolidation accumulated significant pips as EURUSD fell.
Had the NFP report missed expectations signaling weakness in the US labor market, the dollar would have weakened against the Euro, presenting an opportunity for traders to enter long positions on the EURUSD pair rallying.
The uncertainty with economic releases makes it extremely difficult to predict the direction price is likely to move after the news release. Therefore, instead of staying on the fence and waiting for things to play out, one can deploy the Straddle trading strategy.
The straddle trading strategy involves taking both sides of the price action in the short term. With the help of pending orders, one places a Buy Stop order that triggers as soon as the price breaks out of the range and starts moving up. Likewise, one places a Sell stop order that would trigger when the price breaks out of the range and drops.
In this case, only one order will trigger once the price breaks out, presenting an opportunity to get early into a trade as soon as the price breaks out.
While using the straddle strategy, it is essential to use tight stop losses to avoid incurring significant losses.
The chart below shows EURUSD, which consolidated ahead of the NFP report release. A trader placed two orders in anticipation of a substantial price movement from the range after the report. Buy stop orders above the range and Sell stop orders below the range.
Once the NFP report hit the wires and showed resilience in the US labor market, the dollar strengthened against the Euro. The result was the EURUSD plunging on dollar strength. The Sell stop order got triggered, allowing a trader to lock in significant pips as the price moved below the range.
In return, the trader ended up closing the Buy stop order as it was clear EURUSD would continue moving lower amid the dollar strength.
While the focus is usually on what the market will do once the news hits, the reverse usually occurs. Buy the rumor, and selling the news is a phenomenon that occurs when the market starts pricing in the news even before the economic release or any other news release is made available.
For instance, let's assume that the market expects the European Central Bank to cut interest rates on concerns about the health of the EU economy. In anticipation of the cut, weakness starts prevailing on the Euro ahead of the release sending the EURUSD pair lower.
While the market traded lower and lower during the day, when the actual news was released, it was already priced into the currency pair. Consequently, many market participants refrain from the temptation of selling at the new lows—instead, the focus shifts towards buying at the new lows, sending the currency pair higher.
That is precisely what happened in the EURUSD price chart above. The EURUSD pair rallied after the bad news release about the Euro as it was already priced in.
News releases provide some of the best trading opportunities in the forex market. Ideally, you should focus on economic releases likely to trigger heightened volatility in the market. However, focusing on the major currency pairs is vital as they generate significant moves as traders react to the news releases.