In this article, you will learn more about the connections between forex spreads and trading news, including:
- What are Forex spreads?
- What is trading news?
- What is pricing in?
- Expected versus unexpected trading news
- The impact of trading news volatility on spreads
What are Forex spreads?
Forex spreads are the difference between the Ask and Bid prices seen in currency trades. They fluctuate according to demand, supply and the spread charged by the financial service provider.
Trading volume is the equivalent of demand and drives an instrument’s price up or down. Orders that are filled in by the counterparty are the equivalent of supply. We won’t go into depth about Forex spreads in this article, if you are interested in learning more you can read all about them here.
What is trading news?
Trading news is defined as the many economic releases per day from statistical surveys released by government departments like the US Bureau of Economic Analysis and private economic analysis companies like S&P Global. The results of their research are released in public statements that impact on the trading markets and trigger buying or selling of currency instruments. The media quickly spreads the updated research figures.
Examples of trading news include statements from central bankers, economic growth results and projections, consumer spending, inflation rates, and unemployment rates. More examples of trading news events can be found on Admirals Forex Calendar.
What is pricing in?
Information travels fast on the Internet financial highway, so fast that a trading news release can trigger an almost instantaneous reaction in the currency markets.
Economic feedback from trading news releases is quickly priced in by traders around the world who tend to react to anything unexpected in the results. When carried out on a mass scale, pricing in turns into a currency pair trend. The trends can take the form of downtrends (bearish) or uptrends (bullish) which are visualised in market modelling software used in Technical Analysis.
Expected versus unexpected trading news
A market consensus usually sets expectations about the results of a trading event. Each market consensus comes from financial analysts and is reported by the financial media.
The media is closely monitored by traders. When the US releases its latest quarterly economic growth results, for example, the event is preceded by a slew of market consensus. A consensus can be surprisingly accurate. This is because it is not guesswork but is based on official growth forecasts, previous results, and trends in related economic sectors. Keep in mind that any given market consensus forecasts an event in the future and should be taken as an expert opinion, not as a current fact.
Impact of trading news volatility on spreads
Trading news impacts on spreads when it triggers volatility in the currency markets. Volatility can accelerate any given trend and cause sharp spikes in asset prices, which is why experienced traders know to set stop loss limits when they take a position on a currency pair.
Spreads can widen or narrow depending on the circumstances. A rapid increase in volatility can widen spreads as counterparties like banks and other institutions in the order chain become more risk averse in their Bid strategies. This could lead to lower trading volumes in some scenarios like Black Swan events.
Whereas riskier volatility is characterised by sharper highs or lows pressuring the asset price’s movements, there is always some level of change going on in the markets. Healthy price movements are characterised by some volatility, meaning buying or selling interest based on valid fundamental reasons. During these periods, spreads can narrow as confidence increases in the trading markets.
In conclusion, it’s wise to keep in mind the connection between trading news and Forex spreads. Factoring in the potential for widening and narrowing spreads should be key to your risk management strategy.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.
