The Impact of Press Conferences on the FX Market
Monetary policy is vital for the Forex market, and the way it is communicated is quite important to the overall market participants. One must understand here that the Forex market, not uniquely, moves based on what trading algorithms are doing, and not what the Average Joe retail trader is doing. So humans, as traders, come to follow robots. This was not the same a couple of decades ago, but the trading arena has changed beyond recognition due to new technologies that have been invented in the meantime. Monetary policy transmission mechanisms differ from central bank to central bank, but lately, they all agreed to a new principle: the forward guiding principle. This is something relatively new, and was first introduced in the United States of America. The Federal Reserve of the United States (the Fed) changed the way monetary policy was transmitted to market participants regarding the moves the central bank makes, in order to be transparent and therefore to avoid huge financial swings. The whole forward guiding principle was quickly embraced in other parts of the world as other central banks followed the Fed’s lead.
What is Forward Guiding?
Through the forward guiding process, a central bank lets market participants (traders) know the reasons for any decision that was taken, what it is expected to produce in terms of economic effects, and what the future steps to be taken are. These market participants are all the people involved in trading: hedge funds, money managers, quant funds, institutional clients, pension funds, and retail traders, to name a few. The favourite method of monetary policy transmission, and the clearest way, is the holding of press conferences. It so happens that one of the latest moves the Fed made was to introduce a press conference for every other meeting. This tells much about the importance of press conferences, and why a central bank values them so much. All major central banks use them for transmitting their monetary policy, and the market makes large swings when this happens.
Press Conferences to Watch
The importance Press of conferences is associated with how important the respective central bank is to the overall global economy. Having said that, it means that the Fed press conference is the one that is decisive for any Forex trader.
The Fed is holds a press conference after every other meeting. It means that every 12 weeks, a press conference follows the FOMC (Federal Open Market Committee) Statement. Such a press conference is scheduled to start 30 minutes after the FOMC Statement is released, on a Wednesday, typically a few hours before the US equity markets close. Before the press conference starts, and even in the previous 2 days of the trading week, the Forex market only keeps ranges, as no one wants to take a chance before such an important economic event is released. Trading algorithms are programmed to buy and sell the overbought and oversold territories in main major pairs, and therefore ranges are dominated; that is, until the press conference starts. The press conference comprises two parts:
- During the first part, the Fed’s chairman/woman reads the FOMC statement. The market is not that violent at this point, as the statement was released 30 minutes earlier, so it has nothing new in it. However, in this part, the chairman/woman shows the Fed members future projections regarding rates levels and the economic forecasts for the years ahead.
- The second part deals with questions and answers from press representatives, and this is when market moves can turn ugly. If you’re wrong with the positioning at this very moment of time, it means that most likely your stop loss is going to be hit.
European Central Bank
The European Central Bank (ECB) press conference is somehow similar to the Fed’s one, and we might say that the Fed’s inspiration came from the ECB, as the European counterparts has their press conference in place earlier. In this case 45 minutes after the interest rate decision is announced, the press conference starts following the same pattern as the one in the United States. The ECB focuses on different technical factors than the Fed in the sense that it has a single mandate: to keep inflation below or close to 2%. Anything else is of secondary importance. Because of this technicality, the ECB has its staff projections every second meeting. A few years back, the Central Bank changed the frequency of their meetings from once a month to once every 6 weeks. The idea behind this was the fact that monetary policy changes need more time for the effect to be felt on the market. It goes without saying that the press conferences that show the staff economic projections are the ones that move markets the most.
Bank of England
The Bank of England (BOE) does not hold any press conference unless rates are changed, and this makes the forward guidance principle a bit more difficult to implement. However, the BOE uses other opportunities to communicate with market participants. It should be mentioned that the press conferences and interest rate decision dates in the calendar of a central bank are only for guidance. Sometimes, desperate times require desperate measures. The classical example comes from the 2008 financial crisis, when the Fed was in such a hurry to react to what was happening in the markets all over the world as well as the United States, that it didn’t wait for the next meeting. It virtually slashed rates to zero overnight, while starting to inject liquidity.
However, this rarely happens, and staying with the projected plan for the monetary policy transmission process should be the right thing to do for every Forex trader. Central banks try to be as predictable as possible, even though surprises may appear down the road. Such a surprise was when the Swiss National Bank dropped the EUR/CHF floor from 1.20, taking market participants by surprise. It happened in such a way that the announcement was made at a press conference, though, and here you have the perfect example of the importance of these press conferences. Moving forward with our Forex Trading Academy project, we’re going to discuss how to trade the Forex market when a central banker is holding a speech. This is quite a difficult task, as trading should be made based on both technical and fundamental aspects together, rather than only on one of them. Nevertheless, there are some things to do when market volatility is expected to rise, as in the case of these speeches. That is what the next article is going to be focusing on.
Other educational materials
- Forex Trading When Central Bankers Hold Speeches
- Risk-off vs. Risk-on Trading
- Macroeconomics in Forex Trading
- Forex Market Terminology
- Profit from Forex Trading Using Different Trading Styles
- How to Set Up an Expert Advisor
Recommended further readings
- Explaining monetary policy in press conferences. Ehrmann, M., & Fratzscher, M. (2007).
- Developments in Internet financial reporting: review and analysis, across five developed countries. Allam, A. and Lymer, A., 2003.