News trading is a type of trading which aims to speculate on the direction a Forex pair will move on release of economic data. This article attempts to explore some of the factors that may have significance when trading the news.
The FOMC is the Federal Open Market Committee for the US, and it sets a target for the Fed Funds rate at which banks lend to each other in the short term. This affects interest rates and economic activity in the wider economy, as it filters down, with a complex delay factor. Thereby, economic activity can be stimulated or dampened down, contingent on factors such as the inflation rate, which the Federal Reserve needs to control, and the time taken for the effect, intermixed with the effect of multiple changes (or lack thereof) over time.
The Fed has other tools to stimulate the economy at its disposal as well, which were used extensively in the years following the crash of 2008. However, the Fed Funds decision is the key headline piece of news data that the market digests at the moment of release and has perhaps become more prominent as the push for stimulus has waned. It is a core Forex fundamental, as it can affect pairs both in the very short term and the much longer term. It is perhaps fitting, given the complex nature of the Forex market, that it looks to this figure, which itself is layered in complexity in its effect but has an apparent simplicity that makes it a target for trading.
There are a set, pre-announced number of FOMC meetings each year. The FOMC decision is potentially important in financial markets, as it can directly affect the future valuation of USD, and many key Forex pairs are tied to USD. However, the effect on Forex pairs can be complex. The field of news trading is dedicated to speculation on market events such as the possible effect of a Fed Funds decision. This article seeks to untangle some of the factors that may be of significance.
There are many ways of looking at possible effects. For example, raising interest rates may tend to favour USD in USD pairs, but it can also have an opposite or more nuanced effect if it is seen as sending the economy into recession or if the aim is to dampen down economic activity.
However, in recent times, this balance was changed to some extent by unusual rampant inflation. Thus, the Fed was faced with the task of dealing with this inflation through a series of interest rate rises. That is, the concerns of inflation offset the fears of recession (for an unknown length of time).
The fact of initiating a series of rises after a long period of low interest rates itself provided impetus to the dollar. This is a 'macro-level' surprise, but news trading itself looks at micro surprises. There is a factor affecting valuation that is contingent on the unusual until it becomes usual. The caveat for news trading is that the FOMC figure has a kind of intricate effect that works over time, so this tends to make the clarity of the usual less apparent.
The change into the unusual and unexpected is perhaps the most significant moment in news trading. It might be expected that there is a delay in understanding or digesting the effect of a sudden change, but the Forex market can react very quickly to changed news inputs when it has a headline figure to work with. This can be seen from time to time by surprise economic data (not preset in terms of timing), which may occasionally result in sharp market reactions.
To some extent, the Forex market moves at both slow speeds (layers of future valuations) and extremely fast reactions, based on the ways computer programs and human traders will react in unison. Hence, sharp reactions to surprises can be seen as hard-wired into the market, especially if the surprise suggests a future change in valuation.
When factors are aligned, a news trade can produce a very rapid change in valuation in a matter of minutes or less than a minute. However, there is a decay factor in this reaction built into any sense of repetition or expectation. This may result in value oscillations, which can be a regular feature of news reactions.
What this might suggest is that the moment of news trading, close to the release of data, has the effect of narrowing the focus on the effect on valuation and then, after the release, widening it again.
In surprise situations, the narrower focus can align with the wider focus, producing rapid changes in valuation; otherwise, the complexity of immediate changes may produce a complex result, which can itself change as a result of a direction emerging from the complexity, for example, during the news conference for the FOMC or from a market deduction not apparent at the moment of release.
To some extent, the immediate reaction is precisely this, a reaction hemmed in by little room for manoeuvre, which widens as time progresses, eventually getting back to a normal. This said, the intensity of a new session opening near in time to the original release might produce that reprise of the events, which may happen from time to time.
The time of immediate release can be technical in that resistance or support levels may be respected to change the movement of value. Technical analysis and technical indicators are a kind of support when there is little logic to guide. For example, where should a sharp move end or pause? This is highly contingent on future events, as the market is effectively revaluing itself or trying to. But this value is a jump into the future. So technical levels provide a way to add market sense, where there is no or little knowledge, but there is directional movement, shaped perhaps by surprise.
This interplay of fundamental and more subtle applications of technical analysis is part and parcel of news trading. It means that relying on either can be problematic, but using both can be complex and not in the end indicative of the actual outcome, as it is contingent on the unexpected.
Technical analysis is aimed at regularities; it tries to make the market "expected". Thus, it does not tend to have a major role to play in news trading before the release. This said, there may be room for some kind of analysis before release to gauge the possible outcome, if only patterns of volatility, i.e., which way they are tending to go.
Fundamental analysis is important before release (and is the basis for economic calendars as they relate to news trading), with the caveat that there are potentially more factors at play, based on how the market is primed to react and to what extent it can react (i.e., is the release event priced in and how exhausted or elastic is the market). The search for something hidden in data that can indicate a potential surprise is an effort that can yield a potential surprise and direction, but nonetheless, the market may not react in this way, even if these suppositions are correct.
This idea of interplay of factors, shifting strands of possibility based on past, present, and future contingencies, is one that can ultimately suggest staying out of the market. However, the way a Forex pair can change value rapidly is something that remains a draw for traders despite the complexity and difficulty inherent in Forex news trading. But it can be noted that behind any apparent simplicity is a complex story which itself has resolution in the future rather than the present, so the figure itself is a conjecture in the sense of its interpretation in the market, but wrapped in the real world.
