Global financial markets are closely linked through financial and macroeconomic statistics, and the foreign exchange market is no exception. Currency exchange rates – the most basic tool in the foreign exchange market – are subject to important financial news, basic statistical reports and major geopolitical events. However, the actual effect of news on the foreign exchange market is unmatched by any other market. You’ll see three crucial examples of this influence below.
Monetary Policy
For example , the new monetary policy issued by the central bank will immediately affect the performance of the currency pair. If interest rates change too quickly or too slowly, or if there are unexpected comments about future rate forecasts, currency pairs can rise and fall at the speed of light. On September 18, 2007, when the Federal Open Market Committee of the Federal Reserve announced that they had lowered interest rates from 5.25% to 4.75% for the first time, after a series of rate hikes, the EUR/USD exchange rate rose. A clear gap can be seen in the one-hour chart of EUR/USD below, with the euro gaining as the dollar loses some of its appeal due to its low interest rates . The reaction happened instantaneously, followed by a strong uptick.
Macroeconomic data release
Another important type of foreign exchange news that can have a quick and strong reaction in the exchange rate is macro data releases and reports. One of the most obvious examples of this is the quarterly GDP data released by the United States. Money markets react unpredictably if quarterly reports differ from expectations or are visually significantly different (too high or too low) from previous quarterly figures . When the Bureau of Economic Analysis (United States Department of Commerce) released its GDP report for the second quarter of the year ahead of schedule on July 31, 2008, all currency pairs related to the U.S. dollar experienced strong changes. The reported change was +1.9%, below the forecast +2.3%. The chart below shows that the candlestick for the EUR/USD hourly price change just happened to change drastically after the release of the GDP data.