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Trading news can be challenging. Volatility tends to be highest when news is announced, particularly when it relates to central bank actions and sentiment. Moreover, key financial news is generally scheduled when there is a trading session overlap in the market place. U.S. economic news for example, is usually scheduled for early morning (EST) when New York traders begin their day. London/European trading session is still open during that time and market liquidity can be high. Larger spreads, as well bigger moves beyond the average daily range are the norm. 

European and Asian news events are normally scheduled during the middle of the night for U.S. traders, though there is an overlap during the end of the Asian trading session and the beginning of the London session, when the majority of economic news affecting Europe is released. 

Though large commercial banks have a big presence in the market, central banks are the primary market makers, with the U.S. Federal Reserve exerting the greatest influence, due to the reserve currency status of the USD.  Changes in interest rates, asset purchase programs such as the Fed’s Quantitative Easing, underpin price action. In early January 2013 for example, FOMC (Federal Open Market Committee) minutes were released causing wide swings in currency valuations, as well as in bond and equity markets. Unexpected change in sentiment of several Fed members suggesting an end to an asset purchase regime earlier than market expectations, sent many currency pairs as well as gold (XAU) and silver (XAG),  plunging as the USD rallied. 

Some of the features of trading the news are: 

Key News Events. The market prioritizes events based upon their significance to economic growth, as well as fiscal and monetary policies. The critical ones are interest rates, GDP, inflation (measured by both producer and consumer prices), unemployment, employment (U.S. non farm payrolls for example), industrial production, consumer and business confidence, trade balances, and manufacturing sector surveys. Moreover, any public comments made by central bank members can substantially affect markets, increasing volatility. Traders will often wait until after the market digests and analyzes speeches by such, before entering. 

Other Market News. Stocks, bonds, as well as commodity prices can give signals to potential currency price action. Many traders routinely monitor the Dow Jones Industrial Average for clues to USD direction. Bond prices in Europe are another indicator. Political news such as elections as well as national tax and fiscal policies, also play a role. Recent examples were the 2012 parliamentary elections in Greece, the U.S. fiscal cliff negotiations, as well as the election of a new prime minister in Japan. All played huge roles in shaping market direction across the majority of currency pairs and will continue to affect price action in 2013 and beyond. 

Trading Before the News. Markets tend to consolidate before major news releases. This can be indicated by shrinking trading ranges-days, if not weeks before news. In early autumn of 2012 for example, many institutional traders remained on the sidelines for an extended period, waiting for news regarding a potential Spanish bailout. Only when bond yields signified a bailout was not immediately forthcoming (expectations of bailout may have contributed to those lower bond yields), did many traders re-enter. 

Volatility and Opportunity. Currencies often begin their moves BEFORE scheduled news events. The EUR/USD pair for example, often shows great swings in price action and momentum, 30 minutes prior. This occurs frequently when high value news such as GDP and U.S. Non Farm Payrolls data is scheduled. Some traders-particularly scalpers-will enter a trade in anticipation of the results. The attendant volatility can project scalpers into profit, though this strategy is highly risky. The old saying about fire that can cook your food, but also kill you, comes to mind. 

Market Reaction. Volatility combined with liquidity can make for false breakouts as well as huge spikes in the first hour after news. This can often last for several more hours, and sometimes days before a trend is realized or indicated. Many traders therefore, avoid trading immediately after the news and wait for other indications and confirmation signals before entering. As experienced traders know, we can be in the right direction, but suffer heavy losses or worse if our entry was premature. 

Currency Pairs and News. There are pairs that tend to move more than others in reaction to news. Of the majors, the AUD/USD and the USD/JPY often make larger moves after news events, than do EUR/USD, GBP/USD, USD/CAD and the USD/CHF. Matching a strategy-as well as a stop loss and money management system to historical volatility and average trading ranges, can help increase profits and reduce losses. The overall effect of the news, is reflected on the degree of assumptions and expectations that traders had prior, and to what extent the news diverges from that. When news matches consensus expectations, price action tends to resume longer term trends. 

Hedging. Some traders will trade through news events by hedging within the currency pair they are trading, Simply, a trader will simultaneously open up trades of equal size both long and short. They will then close one trade when market has indicated a direction based upon their indicators, confirmation of price action reflected in candlestick patterns, as well as momentum. While this can reduce profit margins, it also reduces risk and may be a useful tool when taking large positions in volatile markets. 

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