How Much Does Economic News Influence Bilateral Exchange Rates

Abstract We investigate the role of economic news in predicting US dollar vis-a-vis the British Sterling Pound exchange rate. We find that it is the negative news (and not positive news) that predicts exchange rate most successfully. This predictability is evident during both recessions and expansions but is stronger during: (a) recessions; and (b) extreme depreciations and appreciations. In additional analysis, we use data for 26 OECD countries and discover that both positive and negative news are important, predicting rates for 62% and 46% of countries, respectively. A range of robustness tests confirm the importance of news in predicting exchange rates.