Do you sometimes wonder why currencies – and by extension the forex market – swing like pendulums? This is because there is a catalyst that drives these swings – forex news.
This article explores how news shapes the forex market. From interest rate decisions to economic indicators, you should know how these developments affect the forex market.
As a trader, it is important to keep up to date with the latest forex news if you want to seize opportunities as early as possible.
Forex News with the Most Trading Impact
In the post-Covid world, financial markets – including forex – have been greatly affected by inflation and interest rates. This is mainly because several central banks including the South African Reserve Bank (SARB) have been raising interest rates to tame runaway inflation.
Let’s look at how inflation, interest rates and employment reports affect the forex market.
Inflation
Inflation is the general increase in prices of goods and services, reducing the purchasing power of money. South Africa’s annual inflation slumped from 5.4% to 4.7% in July 2023, its lowest reading since July 2021.
To protect the value of the Rand, the SARB has to maintain consumer inflation between 3% and 6%.
But how does inflation affect the forex market?
Higher inflation pushes central banks to increase interest rates. This attracts foreign investors seeking higher yields. The result is the strengthening of the currency in question. Traders have to watch these inflation dynamics to anticipate currency movements and adjust their trading strategies accordingly.
Employment Reports
Employment is key in interpreting the economic performance of a country or region. Strong employment data puts pressure on prices, and thus, central banks might step in and tighten financial conditions to contain rising inflation.
Central Bank Policy
When central banks raise interest rates (quantitative tightening), they drain liquidity out of financial markets. This will likely impact currency movements.
Geopolitics
Forex traders should pay attention to geopolitics. For example, the Russian Ruble has fallen nearly 40% this year to hit a 17-month low against the dollar. This squeeze is caused by the country’s war with Ukraine.
How to Trade Forex News on Release
Trading forex news on release requires a strategic approach that maximizes your profits. A study published in 2004 showed that the impact of forex news is usually high on the first two days and can still last till the fourth day.
Traders need to keep an economic calendar handy to know when the key news releases are scheduled. At the same time, traders need to act swiftly when the news breaks, stay calm (emotionally) and practice risk management to limit potential losses in case the market moves violently against their trades.
Final Thoughts: How Forex News Impacts Markets and Traders
Forex news can be a powerful ally for a trader. However, it demands a blend of knowledge, quick thinking and strategy from the trader.
Forex traders should not only stay informed about the latest developments in geopolitics and the global economy, but should also know how to interpret and profit from it.
As a trader, remember to keep up to date with the latest forex news by making use of economic calendars.
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