How Important is Following the News for Forex Trading?
February 16, 2022
By Acuity Trading
Forex rates are significantly impacted by economic factors. A currency is more appealing for investors when its issuing country shows strong potential for growth. This is reflected through various parametres, such as GDP growth, inflation, trade balance, employment rate, and manufacturing and retail industry growth. In the same way, political instability, natural disasters, increased regulatory crackdowns on an industry, wars or regional conflicts, and other such events weaken a country’s growth momentum, and consequently its currency.
For instance, following the Brexit vote in 2016, the pound sterling fell drastically against other major currencies. At the beginning of 2021, the pound was 15% weaker than the euro, compared to its value at the time of the 2016 UK referendum.
So, for forex traders, it’s important to keep track of daily events and breaking news, as and when they occur. Drastic events have the power to significantly increase volatility levels in a currency pair. The January 6, 2021, attack on the US Capitol didn’t impact the stock market, but it led the US dollar index to decline and trade at 89.38. Volatility brings trading opportunities, which will be missed if traders don’t keep up with the news.
Experts will say that it’s incredibly important to have access to reliable news sources that inform you of an event before it breaks on mainstream media. This is because the largest proportion of the forex market is accounted for by central banks, and financial institutions make the biggest trades, which impacts fluctuations in currency prices. They already have a huge army of expert analysts who spend hours making predictions based on proprietary data.
Spotting News That Matters is Important
Any news that has the potential to reverse the ongoing price trend has the maximum market impact. Such news can include economic data releases. For instance, after posting its worst week since March 2020, the US dollar index rose above 95.5 on February 7, 2022, due to a US jobs report that exceeded expectations.
Here, it is important to note that market expectations of the data can often cause a greater impact than the actual data. For instance, the bad week for the US dollar between January 31 and February 6, 2022, was due to subdued market expectations regarding the US Non-farm Payrolls data.
The fact that the US White House warned of a bad jobs report in the wake of rising Omicron cases added to the concern. According to officials, workers who were infected with Covid and didn’t receive their paid leave were to be counted as jobless, and nearly 9 million people were in that category in January 2022, for which the data was being collected. However, the US economy added 467K jobs in January, against a forecast of 150K.
So, a critical thing for traders to understand here is that news is not the same as fundamental information. Traders need to assess various economic fundamentals to arrive at a definite conclusion. Most of the time, it might not be just the major economic data, but long-term industry trends noticed in the daily news.
Trading Strategy Plays a Role in News Selection
Economic data is often a significant driver of short-term forex market movements. These could favour short-term trading strategies. Here, traders use an economic calendar to plan their entry/exit points, based on risk appetite. The volatility that surges in the days leading up to a high-impact data release can provide trading opportunities. Some traders might refrain from trading completely during this period.
Developed countries like the US, Eurozone, UK, China and Japan, and their news events, particularly economic data, have greater impact on the global financial markets, compared to news related to other nations. So, traders need to pay more attention to what the mainstream media is reporting about these countries.
Keeping track of their economic data is also crucial. Some traders factor in this data as well as geopolitical events to make decisions. For instance, the rising global inflation in Q4 2021, and resultant possibility of faster paced policy tightening by the US Fed, and a potential military conflict in Ukraine, led to safe-haven currencies rising. Both the Japanese Yen and the US dollar surged on January 25, 2022. Some important economic indicators to track include GDP growth, CPI, PPI, housing surveys, consumer confidence, and retail numbers.
The lack of pricing in a news event’s outcome could spell opportunities for some traders. For instance, the 2016 Brexit referendum, where markets were priced in on an expectation of “remain.” A huge number of polls leading up to the voting day predicted that the UK would vote to “remain” in the EU. The actual result caused a huge market sell-off. The pound sterling went on to trade at a 31-year low against the US dollar following the vote in June 2016.
Over the next 5 years, not only the pound sterling, but other global currencies also registered several ups and downs due to Brexit news.
The Role of Alternative Data
News is always intended and designed to convey information that eventually leads to action. In the context of financial markets, this means traders assuming strategies based on available information. This has an impact on currency prices. The timing and volume of news articles play an important role.
Technologies that can sift through an extensive volume of news articles, videos, and more to give a picture of market sentiment can provide traders with an edge. This is where alternative data comes in. Based on news and economic data, as well as various other data points like payment receipts, footfall at a retail store, and more, it gives the traders a deeper view of the market.
So, while news tracking is important, it is not enough to make sound trading strategies. Going beyond the headline is important.