How News Events Impact different Forex Pairs


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Video Transcription:

Hello traders. Welcome to the news trading course and the second module, Technical Approach: How to Trade the News. In this lesson, you’re going to understand how events impact currency pairs. We’re going to make the difference between a currency and a currency pair. Remember that when we are looking at a news to be released and the data to be available to us, we are looking at the impact of this news on a economy. So we are looking at the impact on a currency and we profit from this news by trading currency pairs related to the currency that has been impacted by the news. I know it’s difficult to understand but I’m going to make it very easy on this lesson.

How News Impacts Forex pairs

And we’re going to start by making the difference between currency and currency pair. And there is a big difference between the two of them. When looking at for high impact events, we look at news that will have an impact over one currency. When we trade the news, we do it by going long or short on a currency pair. That’s the main difference. Understanding how a currency pair will react because of a positive moving. One currency is what’s key here. Remember that if we have positive news on the U.S. economy, we are not going to blindly buy the euro/U.S. dollar because that would be wrong because the euro/U.S. dollar and the U.S. dollar are negatively correlated.

When we look at a currency pair, we are looking at the exchange rise of two currencies. The first currency of the pair is called base currency and the second currency of the pair is called the quote currency. A bullish pressure on the base currency will make the currency pair to trade higher and a bearish pressure to trade lower. This means that, let’s imagine that we are waiting on news from the Bank of Europe and we have positive news. This will mean that we have a bullish pressure on the euro. This will mean that we are going to go long on the euro/U.S. dollar. And if we have bad news from the Bank of Europe, we are going to have a bearish pressure on the euro, thus we are going to look for short opportunities on the euro/U.S. dollar because the euro is the base currency.

Now, a bullish pressure on the quote currency will make the pair to trade lower and a bearish pressure to trade higher. So you see, it’s the opposite. So if we are looking at the euro/U.S. dollar again, but now we are looking at USD or a news from the United States and we have positive news, that will mean that we will have bullish pressure on the U.S. dollar which will mean that the euro/U.S. dollar is going to trade lower and vice versa. When we have bearish pressure on the U.S. dollar, the euro/U.S. dollar will trade higher.

News Impact Diagram

Now, I made an impact and directionality diagram for you guys. So we have an example. We are waiting for the U.S. initial jobless claims and the previous number is 265K. This means that the unemployment number was 265,000. Now, let’s say that the number decreased and this week’s numbers is 215K. This means that we have a positive reaction on the U.S. dollar. This means that we have a bullish pressure on the U.S. dollar which means that the euro/U.S. dollar is going to break lower. Why? Because the positive reaction is on the quote currency. Now, if we look at the U.S. dollar/Japanese yen pair, this pair will break higher. Why? Because the bullish pressure is on the base currency. If we have bullish pressure on the base currency, it breaks higher. If we have bullish pressure on the quote currency, it breaks lower.

Now, let’s go to the other side of things and let’s say that we have an increase in jobless claims and we have a 300K number. This is negative for the U.S. dollar which will mean that we have a bearish pressure on the U.S. dollar, which means that euro/U.S. dollar is going to break higher and the U.S. dollar/ Japanese yen is going to break lower. A bearish pressure on the quote currency is going to make the currency pair to trade higher and a bearish pressure on the base currency is going to make the currency pair to trade lower, which means that if we have a bearish pressure on the U.S. dollar, we are going to try to buy or go long the euro/USD. And if we have a bearish pressure on the U.S. dollar again, we are going to try to sell the U.S. dollar/Japanese yen.

So basically, this is how you are going to look or how you are going to think when a number comes out. Okay, first of all, is the number positive or negative? Second of all, do we have a bullish or bearish pressure on the currency? Then we are going to decide if we are going to buy a currency pair or sell a currency pair if the currency impacted is the quote or the base currency.

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So to put you in perspective, I’ve decided to show you a chart of the euro/U.S. dollar and a chart of the futures contract on the dollar. The DX is actually the dollar index. But you can see that we have a negative correlation between the euro/U.S. dollar and the dollar itself. When the price of the dollar depreciates, the euro/U.S. dollar is going to appreciate. Why? Because the dollar is the quote currency. Okay? So this is basically what you need to know before even thinking of starting to trade the news. But now that we have gone through this lesson, we are going to start to learn a few technical set-ups that we are going to look for once the news are released.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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