The magnetic relationship between news and movement in the forex market
By Cillian Wilson - Dec 20th 2018, 09:04
Currency value can be affected by a million different news stories during the course of the day - influencing small or significant movements in the forex. News and events are usually centred on either economic, political or banking policy, although there are other ways in which the news can influence and affect both large and small-scale price movements.
Fiscal reports, economic forecasts and budget announcements are the key indicators of a country’s economic health. These events and even rumours of these events can be key alerts highlighting significant trends or patterns in the markets and sending out forex trading signals that can help identify when the right time to trade on the forex, indices and commodities markets actually is. Manufacturing and retail price indexes also send powerful signals to currencies, influencing interest rates and levels of inflation - critical forecasters of an economy. However, changes to GDP and the total output of the goods and services often aren’t great indicators as they will reflect changes that have already happened. But it's not just economic factors at play, other news can also affect the market.
Political Change and Upheaval
When there are changes to the political landscape, the forex begins to move the currency in a certain direction. For instance, the announcement of Brexit in 2016 caused the value of the British pound to fall to a 31-year low and lost value against all the other major currencies. Elections are always key events for the currency markets, too. When political parties have different ideologies on economic reform or management, it nearly always affects the confidence business has and the forex market picks up on these sensitivities. The Swedish Krona (SEK) experienced dips before its elections in September 2018 with concerns over a coalition government being formed - enough to halt the Riksbank’s decision to increase interest rates.
War & Natural Disaster
Unlike financial crises, a war can be much more devastating to a country’s currency. When the Gulf War started in 1991, it had far-reaching effects on the Iraqi economy, exacerbated when the UN decided to impose sanctions, which led to overprinting and a devaluing of the dinar.
When a natural disaster hits, it can also impact the economy in many ways, from the sheer cost of cleaning up, to the loss of supply chain infrastructure and manufacturing output. When the 2011 Japan earthquake hit, the yen initially dipped sharply. It soon recovered once Japan received repatriation and insurance from overseas.
In 2015, the European Central Bank (ECB) decided to initiate a quantitative easing program that added €60 billion per month. It was taken following the Eurozone crisis that included Greece and Portugal and their subsequent bailouts. The result was an immediate reduction in confidence in the Euro and the currency dropped immediately.
Even states that are heavily invested in commodities can experience extreme banking policy changes that affect their currency. In 2015 the Central Bank of Russia decided to hike interest rates from 10.5% to 17% after experiencing a fall in oil prices which affected revenues. While it stabilised the oil-reliant economy, the ruble (RUB) suffered against the US dollar (USD).
The bottom line when it comes to the relationship between the forex market and news events is that careful monitoring of them can generate significant benefits if interpreted the right way. These can include fiscal measures, tightening restrictions on certain sectors or foreign policy. Getting a sense of early indications of any of these events can have varying levels of impact, both short and longer term on a nation’s currency and the forex trading floor.
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