In general terms, most forex dealers look only to economic news to gauge its effect on monetary policy and interest rates. News, which indicates a more aggressive (hawkish) central bank generally tends to drive up forex rates relative to weaker currencies, while doves (calmly optimistic) economic reports usually depress the currency. But, it is important to note that the two types of news are not mutually exclusive.
Some central banks, such as the Federal Reserve or the Bank of Canada, release an economic forecast or survey and then announce it ahead of time. The report can then be immediately followed by an announcement about the monetary policy of the central bank. For example, in the case of the Federal Reserve, this announcement would indicate whether or not it will raise interest rates in order to stimulate economic activity, or if it will lower rates.
Economists say that one of the reasons why interest rate announcements are so important is because they determine the level of interest in a financial instrument. A lower interest rate means lower borrowing costs. It also makes it easier to obtain credit, meaning that the economy gets the needed funds for investments. Therefore, it is critical that all financial institutions to keep a close eye on central bank economic forecasts, and that they keep their eyes open for any signs that the central bank may be about to cut rates in order to boost the economy.
Another way to gauge the impact of economic news on the forex market is to take advantage of any news that has been released before the market closes. This is especially important if you are holding foreign currencies in your account. If you have an extensive trading history in forex markets, you may have noticed that this type of news usually does not have a particularly dramatic effect on the market.
However, when economic news releases come out after the market closes, there is usually some movement in the market as the news spread across the globe. Many traders make the mistake of focusing on news about central banks one-step ahead of when the news is actually released. They then try to predict what the central bank will do as soon as the news hits.
The first thing traders should look for in such news is that the central bank is announcing its intentions (as opposed to simply reporting them). – after all, it is only going to be the central bank that will determine whether it will cut rates or raise them. and that is the first thing that traders should focus on.
The next thing that traders need to look out for is the type of news. If it is a forecast of economic activity (such as the US National Bureau of Economic Research report), the market will react in one of two ways – it either moves in the direction of that forecast or remains flat.
If the news release contains information that is negative (like the BOP report), the market will go down, and if it contains positive (like the FOMC report) the market will move up. This is one of the main reasons why it is important for traders to take advantage of any economic reports that do not contain negative elements.
If a forex trader is looking to profit in the forex market, it is important to be able to understand whether or not a news release will affect the market – if it does, they should make a decision on whether or not they want to buy or sell based on the information that is contained within the news release. This is the most important aspect of economic news that many traders fail to consider.
When it comes to forex news releases, traders need to take the time to carefully analyze the wording of the release. It is often best to avoid trading on news releases if the words “may”, “believe”, “believes”should”, are used. This will tell you right off the bat whether or not the news release will have an impact on the forex market.
Finally, it is also important to note the fact that a news release is not always the final word on a currency pair. There may be another announcement that will be made later. As a result, traders need to continue to monitor the market to ensure that the news is accurate at all times.