How to Use a Forex Economic Calendar?

Before starting opening positions, most experienced traders take a look at the Economic Calendar. This lists the exact times for all announcements and currencies, which might be affected. It essentially forecasts the dates and exact times of expected market volatility.
The economic calendar can be used in several ways. Firstly, since it also includes the numbers from the previous release, the trader can get some idea about the direction of economic indicators. For example, the latest Eurozone inflation forecast came out at 0.7%, with the previous release at 1.2%. This shows that HICP is not only much lower than ECB’s goal of ‘close to 2%’, but it is recently diverging from that mark even further. So we might conclude that this is going to put more pressure on EUR.
The economic calendar also shows the consensus of forecasts; basically, this is the market expectation. For example, there is an upcoming event risk of the Reserve Bank of Australia Interest rate decision. It is forecasted to stay at 0.25%. If the RBA unexpectedly hikes the rates to 0.50%, that would exceed market expectations and can be very bullish for the Australian dollar. On the other hand, a rate cut to 0% would be bearish for AUD.
Finally, the economic calendar might be helpful for some traders to identify times when to avoid trading. During the major announcements, the market becomes less liquid and much more volatile. Therefore, some experienced traders look at the economic calendar and close their positions before those news releases come out.

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How to Read Forex Economic Calendar

Every live Forex economic calendar lists all of the upcoming economic data releases and fills it with actual numbers as these announcements start to come up.
However, it is worthwhile to keep in mind that not all data releases have the same impact on the market. Many Forex news websites do categorize and mark them as either low, medium or high.
   How to trade Forex using economic calendar
  • Low volatility marks the announcements with little expected market reaction, this might include some minor bond sales, results of some surveys and other not well-known indicators.
  • Medium volatility denotes more important news releases with a moderate impact on Forex. Retail sales, trade balance, other household spending data often end up in this category.
  • High volatility includes the most important events, such as interest rate decisions, Consumer Prices Index, Gross Domestic Product, Unemployment Rate and Non-Farm Payroll numbers.

Daily Forex economic calendar

Obviously, there is no such thing as the single best economic calendar for all traders. Everyone might have his or her own preference. Some people might prefer some particular design of the calendar, while others might like to use one which comes with their trading platform.
Just to take one example, there is the Axiory economic calendar for Forex trading, which lists all important economic news announcements. Its trading platform Metatrader 4 has both apps and computer software for download, all of which have an economic calendar for traders attached.

What are some of the most important items on the economic calendar?

So to which announcements should traders pay the most attention? The most obvious one is the central bank interest rate decisions. In general, everything else being equal, higher-yielding currency attracts more traders and investors, while the lower-yielding ones are mostly used for carry trade and borrowing. Very often the statements made at the press conference by the chairmen and other board members can be equally important as the actual rate decision.
The latest Consumer Price Index announcements can be the second most important items on the list. Most central banks in the world are actively targeting some level of inflation. Therefore the latest figures can give traders and investors an opportunity to analyze how close CPI is this goal and how authorities would respond to divergence. Inflation is also an essential component for any long term Forex analysis, such as determining Purchasing Power Parity levels.
Next to the list comes the unemployment rate. Most of the central banks, the Federal Reserve being the exception here, do not have an official target for this. However, they usually do respond to the significant changes in jobless rates.
It goes without saying that Gross Domestic Product indicators, especially the growth rate of real GDP is another important factor in moving the exchange rates. Currencies are supported with strong economic indicators, with traders realizing that in this case, central banks are more likely to increase the interest rate.
On the other hand in case of weak growth or even recession, the Federal Reserve, for example, is more likely to reduce rates significantly and expand the Quantitative Easing program, quite often leading to dollar weakness in the process.
Other important new announcements include Non-Farm Payrolls, Consumer Confidence Index, Trade and Budget Balances, Retail sales, Home sales, and Manufacturing Purchasing Managers Index.

How to trade Forex using economic calendar

At first glance it might seem a good idea to trade during major announcements, after all, high volatility does create opportunities for significant payouts. Actually, many professional Forex traders usually try to close their positions before the major announcement and only resume their trading as the economic data is released and market reaction becomes clearer.
The reason behind this is that because many traders close their position before those announcements, the liquidity in the market is lower. This increases the risk for traders significantly. Surely traders can get lucky sometimes, but before the news release, it is mostly still a 50/50 guessing game. Even if the forecasts ended up being accurate, it is still difficult to guess what will be the exact reaction of the market.
The problem here is that the traders might already be expecting the actual outcome of the news release and priced it into the currency pairs. So by the time the central bank rate decision or latest CPI or GDP numbers come out, the market might have a quite different reaction, than one could logically expect. This is why the saying: ‘Buy the rumor, sell the fact’ is so relevant for the Forex trading.
To illustrate this, let us look at some of the real-life examples of this and how the market responded to those types of announcements.
 Economic calendar for Forex trading
Due to COVID-19 concerns, the US Federal Reserve has decided to cut the Federal Funds rate by 25 basis points on March 3rd, 2020. As we can see from the chart above, the initial reactions from traders and investors across the globe was quite predictable. The day before this announcement, USD/JPY was trading above ¥108 level. After this decision, the US dollar started to fall, within 4 days eventually declining to  ¥102.
After this development, USD/JPY started to recover, eventually returning to  ¥108 level by March 13th. However, 3 days later the US Federal Reserve made an emergency announcement, further cutting Funds rate by 150 basis points, reducing it back to 0 to 0.25% range.   
Now, according to the conventional wisdom, the pairs should have fallen even much harder, than in the previous case, since the 1.50% cut is more significant than 0.25%. At first sure enough, the Japanese Yen appreciated and the USD has fallen to near ¥106.   
However, after this initial decline, the USD/JPY has risen steadily for the next 4 trading days, eventually ending the week well above ¥110, a higher level, compared to the day before the Federal Reserve started cutting rates.
So how can we explain this? Why has USD/JPY not responded to the second and larger rate reduction? Well, one of the reasons for the steep decline to ¥102 after the first announcement, might be the fact that the market judged that the Federal Reserve would not settle for just a one-off 25 basis point rate cut.
With the spread of the COVID-19 virus many businesses like airlines and hotels suffered serious losses, some of them could potentially end bankrupt. In several countries restaurants, bars, museums, and cinemas have been closed down. Many other firms have temporarily suspended their operations. As a result, many people lost their jobs.
Clearly any honest analysis can conclude that this could most likely lead to a significant decline in the economic activity. Considering that the household consumption and business investment are two essential components of gross domestic product, this can have a major impact on future economic growth. Therefore traders and investors across the world expected more decisive action from the US central bank.
Therefore, by the time of this massive 150 basis point rate cut, this step was mostly priced in and expected, therefore USD/JPY has soon recovered from a short-lived decline.
Therefore, when it comes to announcements with the highest expected volatility,  one way to deal with this is to close all positions before this event risk, observe the relevant Forex pairs for some time and resume training afterward.
Another option is to guess the possible outcome and place positions accordingly. Returning to our earlier example about the Reserve Bank of Australia, if it decides to go for a rate cut to 0%, then this is going to disappoint the market expectations. So if a trader expects this outcome, then it is possible to open short AUD/USD, long EUR/AUD and similar positions.
However here stop-loss orders are essential to cut losses in case the market goes in the opposite direction. As we have seen from the above example, guessing the currency movements after major announcements can be notoriously difficult. Therefore, stop-loss orders can act as a valuable insurance policy in those cases.

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Economic Calendar for Trading - Key Takeaways

How to read Forex economic calendar

  • The majority of items on the economic news calendar are usually marked with low expected volatility. It might be interesting to take a look at those, but mostly they have very little influence on the exchange rate. Therefore, in most cases, the trader can safely carry on with business as usual, during those announcements.
  • A significant portion of the experienced traders close their positions with economic news releases with high expected volatility. The reason being that low liquidity and unpredictability of market reaction can potentially lead to severe losses.
  • The actual market reaction may not go in the way as conventional wisdom might suggest. For example, the central bank might hike interest rates, but the currency can still fall. The possible explanations for this can be several: It might be that the rate increase has already been priced in the pair, traders turned to profit-taking or other reasons.

FAQ: How to Trade Forex Economic Calendar

What are other events which are not mentioned in the economic calendar, but can still cause a major volatility in Forex?

Clearly, there is no such thing as the best Economic Calendar with no imperfections. It is simply impossible to quantify all of the economic news. 
For example, events such as general elections, referendums, natural disasters, disease outbreaks, statements from the treasury secretary or chairman of the central bank may not be included in many economic calendars. However, they can have an even greater impact on the exchange rates than the latest GDP numbers or interest rate decisions.
For example, the results from the 2020 US Presidential election can have a major impact in the government’s subsequent fiscal decisions and economic policies in general. This, by extension, can have a serious impact on USD. The same goes for general elections in other countries and their currencies.

Why are some bond auctions across the world marked with low expected volatility in the economic calendar?

Bonds and treasuries come with different maturities, from as short as 7 days going as long as 30 years. Therefore, 1-week and 4-week treasury auctions might not have that significant impact on the market, since only a very small portion of US debt is denominated with such a short maturity.
However, not all auctions are marked with low expected volatility. On many economic calendars, the 10 year US bond rate is usually given at least medium significance. The context also plays an important role. For example, the Bond Yields of the Eurozone countries during the sovereign debt crisis had a much more significant impact on Forex, than during normal times.

What are some techniques the experienced Forex traders use when trading major news announcements?

Some experienced traders prefer to abstain from trading during the major announcements and only resume trading when the direction of currency pairs become clearer.
Another approach is to look at the market expectations, also the previous release for each announcement and try to guess whether the actual numbers would be in line with forecasts.
This is obviously a high-risk strategy and clearly people may not risk a significant portion of their capital on those positions.
Finally, some traders look at the market reaction to major announcements for 10 to 20 minutes and then try to open a contrarian position. The reasoning behind this being, that the initial response to economic data release is usually irrational and after some minutes currency pairs end up reversing their trends. This is another high-risk strategy and does require stop-loss orders to insure against potential losses.

Did the Pound become more volatile during the EU referendum than after Bank of England rate decisions?

Usually, after the central bank rate decision, 1 to 3% variation is very common among major currencies. However, what happened during the UK EU referendum was even larger in scale.
Before the results started to come in, Pound was trading at $1.50. The currency held on as well as Gibraltar and some other constituencies voted to remain. However, the Sunderland results have shown a significant support for leaving the EU and it became clear that final results would go that way, the British currency started to fall dramatically.
By the end of the trading day, GBP/USD fell to $1.32, the level not seen since 1985. The pound has also collapsed against the Euro, falling by 7% to near €1.21. This event had a major impact not only in GBP based pairs but other ones as well, with EUR/USD falling by as much as 3%.
Those types of dramatic shifts have not been seen during the Bank of England interest rate decisions. The only event which can be compared to this by its impact took place back in 1992 when GBP fell dramatically as a result of the collapse of the exchange rate mechanism and Pound’s peg to the German mark.

Does every business day have some economic announcements?

The most business days during the year have at least some minor announcements. However, there are exceptions to this. For example in the US, the major central bank decisions and economic releases are not made on Christmas, New year, Independence Day, Thanksgiving Day and other holidays. Trading is also closed for those times, therefore global volume can be much lower in Forex for some of those days.
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