FOMC and NFP: How Forex Market is Guided by Economic News
Introduction
Technical analysis, being so useful in the context of price movement, is equally essential to successful forex trading through way of fundamental analysis, i.e., the impact of important economic news.
Economic news release also has with it enormous volatility and surprise price movement, with huge possibilities and enormous risks.
Among the most powerful economic releases are Federal Open Market Committee (FOMC) announcements and Non-Farm Payroll (NFP) report.
All serious currency traders should be able to read and respond to them.
This article will discuss why NFP and FOMC are important, describe how currency markets are affected by them, and provide tips on coping with the resulting volatility.
Here at WealthPioneerFX, we equip our traders with the right training to best predict and respond to news-making events within the market so as to optimize opportunity and limit risk.
The Non-Farm Payroll (NFP) Report
What is NFP?
The Non-Farm Payroll (NFP) report is an American monthly economic report released by the United States Department of Labor, typically on the first Friday of each month.
It measures the number of new jobs formed in the U.S. economy during the last month, excluding farm laborers, government employees, private household workers, and employees in charity organizations.
The NFP is widely awaited as it provides some general idea of how well or worse is America's job market performing, which is one of the most significant contributors to economic growth and inflation.
Why NFP is Important to Forex
* Interest Rate Expectations: A strong NFP report (better-than-predicted number of jobs created) signals a good economy and, thus, the likelihood of the Federal Reserve (Fed) increasing interest rates. Increasing interest rates makes the U.S. Dollar more attractive to investors and, thus, strengthens it.
* Consumer Spending: Growing consumer spending and income mean more jobs being created, which keeps the economy going. This positive expectation can be good for the U.S. Dollar.
* Market Volatility: Because its influence is so dramatic, the release of NFP would normally lead to wildly rapid, sudden price movement in currency pairs involving the U.S. Dollar (i.e., EUR/USD, GBP/USD, USD/JPY).
Traders typically receive larger spreads and slippage at this time.
Federal Open Market Committee (FOMC) Meetings
What is FOMC?
The Federal Open Market Committee (FOMC) is the Federal Reserve System's monetary policymaking group. The FOMC convenes eight times a year in regularly scheduled meetings with additional meetings as required.
These meetings are the foundation of economic and financial conditions considerations, establishing the most appropriate position of monetary policy, and responding to the risks to its long-term goals of price stability and sound economic growth. The most relevant implications of FOMC meetings are federal funds rate determinations, quantitative easing/tightening, and publication of the FOMC Statement and economic projections.
Why are FOMC Meetings Important in Forex?
Interest Rate Decisions
The FOMC uses the federal funds rate as the best monetary instrument to affect the economy.
The rate directly affects the attractiveness of the U.S. Dollar.
Increased rate will strengthen the dollar
Reducing the rate weakens the dollar.
* Forward Guidance: The FOMC Statement discloses coming committee intentions for monetary policy. Traders are highly sensitive to the wording for clues of future rate increases or reductions, and a shift in the Fed's perception of the economy.
* Press Conferences: The press conference by the Fed Chair following some FOMC meetings can provide additional commentary on the action and view of the committee, and to further contribute to creating more market volatility.
* Quantitative Tightening/Quantitative Easing: Fed balance sheet operations (government debt buying or selling) can influence currency valuations and liquidity significantly also.
Economic News Trading Strategies
Major economic news releases such as NFP and FOMC demand a highly disciplined approach to pre-release trading because of the built-in volatility:
1. Stay Up to Date: Monitor economic calendars in order to be exactly aware when these reports are being released. Attempt to have some idea of what the market is expecting out of the data.
2. Avoid Release Time Trading: With the exception of most traders and beginners, no one should trade at or just before high-impact news releases. The initial response is both erratic and biased.
3. Sell the Confirmation/Retracement: Do not try to catch the initial spike. Let the market digest the news and form an established direction or trend. Let the price hit major levels or let technical indicators confirm the new trend.
4. Use Pending Orders (cautiously): Some advanced traders use pending orders (buy stop/sell stop) placed above/below significant levels in anticipation of capturing breakouts. The approach has a highly probable whipsaw as well as slippage risk.
5. Practice Strict Risk Control: Utilize stop-loss orders always to manage potential losses. Use bigger stop-losses than normal when markets are highly volatile, or keep your position size small to manage larger price movements.
6. Think of the Reaction, Not Just the Numbers: Sometimes what the market actually does react to as a consequence of an economic report can be more than what is in the report.
A good report might lead a currency to fall if it fails to meet exorbitant expectations, or because of something else.
Conclusion
Economic releases, particularly NFP release and FOMC meetings, are good spikers of the foreign exchange market's volatility.
They possess good profit potential but with high risk.
Having insight into the dynamics behind how these releases influence levels on the currency and the application of good trading technique, you can more effectively navigate these moments.
Keep in mind that profitable trading is not forecasting news, it's managing risk and reacting reasonably to price action.
WealthPioneerFX is committed to assisting you with the guidance and convenience to make smart choices in an ever-evolving market.
Take control and trade with confidence. Sign up today with WealthPioneerFX!
Disclaimer: Trading foreign exchange on margin is extremely speculative and may be inappropriate for all investors.
The extremely high leverage will take a very, very long way against you as well as for you.
You should thoroughly examine your objectives to invest, experience level, and risk sensitivity before engaging in a foreign exchange investment strategy.
A high probability of losing some or all of the money you originally invested and thus should not invest capital that you cannot afford to lose.
You ought to be informed of the full range of risks of foreign exchange dealing, and should take advice from an independent financial adviser if unsure.
