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Deciding Which Currency Pair to Trade When Big News Hits

Deciding Which Currency Pair to Trade When Big News Hits

Tyler Yell, CMT, Currency Strategist

Talking Points:

-Why Trade The News?

-Which Pair Not To Trade?

-Which Pairs May Offer the Best Upside?

Few traders can resist trading into, through, or after a big news announcement. The reason many traders are drawn to news announcements like a horse to water is the movement that follows the announcement. What could have been a top move of the year was provided by the European Central Bank of January 22, 2015 when a massive Quantitative Easing Program was announced with the following information courtesy of ecb.europa.eu

22 January 2015 - ECB announces expanded asset purchase programme

  • ECB expands purchases to include bonds issued by euro area central governments, agencies and European institutions
  • Combined monthly asset purchases to amount to €60 billion
  • Purchases intended to be carried out until at least September 2016
  • Programme designed to fulfil price stability mandate
Deciding Which Currency Pair to Trade When Big News Hits

Presented by FXCM’s Marketscope Charts

Why Trade The News?

As you can see above, trading the news allows you to catch swift moves. Swift moves especially occur when the market is surprised about the results relative to expectations. If you don’t know how to spot news high-importance news events, you can look to the DailyFX Economic Calendar to help you filter out high-importance events and when they’ll take place. You can see, only important events like the Bank of England Quarterly Inflation Report.

Deciding Which Currency Pair to Trade When Big News Hits

Courtesy of DailyFX’s Economic Calendar

The Inflation Report is critical to the outlook of the GBP for many reasons. A positive surprise would encourage the view that the Bank of England could raise rates sooner than many in the market expect, which could commence a sterling rally of similarity to the USD’s rally from summer of 2014. However, a disappointment would lead to GBP weakness especially against stronger currencies like the USD, JPY, or CHF in 2015.

Which Pair Not To Trade?

The first thing to note when trading the news is that we do not know what the print will be. While a simple precept on the surface it’s important to know that the trend is most important when looking at the news. Whether you’re using a moving average, Ichimoku, Donchian or other trend identifying indicator, the direction of the trend should not be fought. Therefore, even a positive surprise from a news announcement like the QIR from the Bank of England should not be traded against strong currencies like the USD.

Learn Forex: Regardless of the Print, Try To Avoid Fighting the Trend

Deciding Which Currency Pair to Trade When Big News Hits

Presented by FXCM’s Marketscope Charts

Which Pairs May Offer the Best Upside?

You know that news events of high importance can cause large moves in the FX market. You also know that regardless of the news print, it’s best not to fight the overall trend. The last point we want to cover is that if you’re hoping for a news surprise, you should look for trades in the direction of the trend. Therefore, when looking at a key news event that would affect the GBP, we want to find trends where GBP strength has already emerged like GBPCAD where a positive surprise would honor the path of least resistance. This is currently available on GBPCAD due to the correlation of the Canadian Dollar to US Oil.

Learn Forex: Regardless of the Print, Try To Trade with the Trend

Deciding Which Currency Pair to Trade When Big News Hits

Presented by FXCM’s Marketscope Charts

Summary

Lucky for us, the forex market never sleeps and that means the market-moving news never stops. You’ve been introduced on ways to strengthen your analysis and this article looks to bridge the gap between the fundamentals (news based) and technical analysis.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@dailyfx.com

To be added to Tyler's e-mail distribution list, please click here

Tyler is available on Twitter @ForexYell

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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