The UK has always been a major Forex trading hub because of the London trading session, which is one of the most active sessions in the trading world. When the London session opens, currency pairs, also known as major pairs, have heightened volatility, and traders can catch many trading opportunities. As a result, news that comes out of the UK and Europe has a profound impact on financial markets, especially on currency markets. Let’s now analyze how major FX news is affecting Forex pairs and how to anticipate market reactions.
Forex market sensitivity to major news
Traders closely monitor major Forex news to avoid losses due to sudden and unpredictable price movements. Currencies are especially prone to major news like non-farm payrolls, interest rates, inflation, CPI, GDP, and more. This is because currency is the backbone of an economy, and when the country’s economy is strong, so is its currency. If there is major news about a worsening economic situation, such as a slowing down of GDP and increasing inflation and unemployment, the currency will lose its value, hence so much sensitivity to major financial news. UK and European markets are heavily impacted by major economic reports, central bank decisions, and geopolitical events. While forex major pairs are highly liquid pairs, increased volatility still makes them risky to trade during major news releases.
UK Economic news that moves Forex markets
Several news sources in the UK are potent and often drive markets into frenzy mode. Bank of England (BoE) announcements such as iterate rate decisions, inflation reports, and policy statements can seriously shake Forex markets, especially GBP-denominated pairs. This news is most powerful for Forex, and every retail Forex trader must monitor it to avoid sudden price volatility. The second wave of news, when it comes to impact power, is GDP and employment data. While the employment data is more profound, GDP announcements also affect GBP pair rates. Surely, major geopolitical events also have a deep impact on GBP/USD and other GBP pairs. Brexit had a serious impact on GBP pairs as it caused the pound to lose its value against other currencies, which is felt even today, years after the event.
European news and its market impact
When it comes to Europe and the European Economic Zone, the main entity governing the Euro is the European Central Bank or ECB. The ECB is responsible for issuing various reports and statements, which historically have a profound effect on EUR pairs. Rate changes, quantitative easing, and inflation outlook coming out of the Eurozone make EUR/USD and other EUR pairs usually very volatile.
Other waves of major news from the EU that seriously impact EUR/USD are GDP, CPI, PMI, and unemployment data. Political events are universally impactful across all financial markets and countries. A similar is true for Forex pairs. When there are major elections in the EU, the EUR tends to feel the pressure. Referendums such as Brexit and geopolitical risks such as wars also tend to reevaluate the EUR against other currencies.
How traders react to news
Traders often quickly respond to major UK and European news. Some of them close their positions, especially funded traders, to avoid news trading volatility, and some prop firms even have rules that prohibit news trading. Some traders, on the other hand, have strategies that directly aim to capitalize on large price swings caused by major news.
Short-term and long-term reactions
Short-term reactions cause a short-lived “chaos” in the price action across GBP and EUR pairs. Traders sometimes try to capitalize on these short-term moves and scalp the news. However, if the released news event is a profound one, such as interest rates, for example, the long-term effects are also highly likely. Trends caused by major events like Brexit tend to last from months to even years.
News trading
Entering trades right after the news to catch sharp movements is called news trading, and traders can have various strategies here. Some of them use pending orders, and when the price hits either side of the market, they tend to enter the trade and generate profits. However, news trading is incredibly risky because investors do not always react correctly to the news.
