This is a chapter of a recent eBook I wrote about Advanced Option Strategies for Expert Traders. I own no right to this book, so I am only posting this for you to view freely. 🙂
The U.S dollar and the Euro are the largest currencies in the world. They also represent the largest trading and economic blocs. The number of corporations that do business in both Europe and the US is very high. Since both of those currencies are so popular, it is almost impossible to find arbitrage opportunities. Regardless of this fact, this pair is popular among Forex traders. It offers low bid-ask spreads and a continuing liquidity for a trader who wants to sell or buy. The pair gained popularity thanks to those two important features. Not only that but the number of the participants in it and the all-time availability of not only financial but also economic data. This allows the traders to steadily re-consider and formulate the options and positions they have according to the pair. Thanks to this constant activity, levels of volatility are high, and this leads to high-profit opportunities.
– News Strategy on EUR/USD according to the European Central Bank
A very high intense trading session for the EUR/USD according to the market volatility happens on the day of the Press Conference of the ECB. When this happens, a 100 pips movements are very possible, which means, you should be very prepared and know how to react and take advantage of the current happening high volatility. Here is a way, from bottom to top, of how to go through the European Central Bank Press Conference and a way to adapt your own strategies.
On the first Thursday of each month at 15:45 GMT, the ECB announces their rate decision. The ECB Press Conference is 45 minutes after this event and the rate decision is set in the market. It is very good for the EUR if the value is higher than the forecast. When ECB raises their current rate even with 0.5%, the investors will have to pay a bigger price if they want to borrow money. Like this, it will be more expensive to have currency, and the effect of this will be in favor of the EUR compared to the US dollar. The other way around, it will be cheaper to possess EUR if the rate drops. Like this, the US dollar will be considered to be the stronger of the two.
The speaker of the ECB Press Conference is its president – Mario Draghi. This is ECB’s main method of communication with investors about monetary policy. Receiving a detail for the factors that have affected recent policy decisions, like the overall economic inflation and outlook. The provided clues about the future monetary policy are the most important part. Right now, the main concern of the ECB is that they have to bring the inflation rate to 2% (when the current one is less than 1%). So, as a future expert trader, you should pay close attention to this Press Conference and to exactly what Mario Draghi says. This process will take you one hour since the conference is that long. It starts with a prepared statement, and after that, the Press Conference is open to questions from the press. It is often the case that the questions lead to answers that weren’t expected and this can create high volatility. From the speech of the ECB president, you should pay close attention when he talks about inflation, economic recovery, and unemployment. If he is saying that something is “low”, “risky”, or “downside” – this is a dovish tone, which means the EUR/USD goes down. Words like “high” and “stabilizing” are a hawkish tone, which means the EUR/USD goes up. The successful/hawkish tone is associated with phrases that are about moderate or strong state according to the economic state. The opposite associating is referred to the dovish tone. If you learn how to “read” those ECB statements, you will highly improve the trading strategies you have, and not only that, but you will likely gain more profit. Also, if there is an unexpected answer on the conference, you will be prepared for it and you will know about the potential losses you can experience, and by knowing that, you will be able to limit them.
– EUR/USD News Trading in the US Labor Market
Are you aware of the fact that the Non-Farm Payrolls are the most important macro indicator? It has always been highly important, but a much-expected publication of the month for the past six years among investors. You want to know how that happened. To put it in a few words, once Ben Bernanke became the new chairman of the Federal Reserve, a financial crisis broke out. This made the biggest economical Central Bank of the world to figure out ways to fix the “broken circuits”. FED came up with two objectives – to create jobs, and improve the labor market like that, which means reducing the unemployment rate to 6%, and the other objective – to make the inflation stable, which means around 2%. The first objective had a big consideration. It was the indicator showing how many jobs were created every month – the Non-Farm Payrolls.
Let’s take a closer look at the NFP indicator, though we already discussed it in the previous chapters. As we already learned, the NFP is the change in the number of people who have been employed the previous month. This is released monthly – the first Friday after a month ends. This important release contributes majorly to the markets. The indicator is very important because creating a job is the leading indicator of consumer spending. This shows the importance of the overall economic activity. Also, keep in mind that two days before the NFP is publicized, an ADP governmental report is issued. The ADP and NFP are almost alike, but not always correlated. Sometimes the ADP comes a day or two earlier than the NFP, and after the release of the NFP, it is taken a heavy disappointment. You should build your trading strategies around the fundamental logic we are going to discuss below. We will use the EUR/USD as an example since it is the most traded instrument in the world.
Firstly, you should focus both on the forecasted and actual value. If a report comes out, stating that the actual value goes above the expectations, this will mean that the US labor market is improving and the economy is strong. This effect will cause investors to appreciate more the US dollar, and because of that, sell the EUR, which will cause a drop in the EUR/USD. The other way around, if a report states that the actual price is below the expected, the main objective of the FED is away and the economy is not as strong as the markets expected it to be, which leads to a disappointment from the investors and they will sell the USD and buy the EUR. This will be good for the overall EUR/USD. Not overrating the effect of the NFP report is very important in trading. This is because of the fact that NFP publication is judged monthly. For an example: in both June and July, the NFP disappoints the investors’ way below the expected, but in July, one had a lesser impact than the June because it was already expected by the markets. Those weak numbers can occur by a possible seasonal factor, like a very cold weather.
Lastly, it is good and important to practice and master these kinds of subtleties, in order to apply them afterward in your created trading strategies, which will make you more and more profitable in time. Just like we already said before, be very careful with your trading strategies once the NFP is released. In an addition to that – be also aware of the market’s mood!