Why Forex Spreads Widen During News Events

When a scheduled economic report (jobs data, interest-rate decision, inflation print) is about to be released, forex spreads widen because liquidity providers can no longer predict fair value with confidence. They widen their bid-ask spreads to protect themselves from executing at stale prices in a suddenly volatile market.

The Information Asymmetry Problem

The core reason why forex spreads widen during news is simple: right before a data release, the true fair value of the currency pair becomes unknowable. A liquidity provider (a bank, electronic communication network, or prime broker) makes money by buying at the bid and selling at the ask. In calm markets, the gap between bid and ask is small — they profit on volume and precision.

When an economic report is about to be published, the liquidity provider faces a profound problem: it does not know what the data will say, but it knows that traders do (or will within milliseconds). This creates an asymmetry. If the liquidity provider quotes a tight spread and the data is stronger than expected, traders will immediately sell the currency to the liquidity provider at the old (now stale) ask price. The provider loses money instantly.

To protect against this risk, the provider widens the spread. A wider spread makes the cost of trading explicit: traders get worse execution, but the provider gets paid for bearing the unknown risk. This is a classic insurance mechanism. Bid-ask spread widens because the cost of information risk has increased.

Scheduled Events vs. Surprise Shocks

Scheduled economic releases (non-farm payroll on the first Friday of each month, central bank decisions on preset dates, inflation reports on fixed calendars) are predictable, so traders and liquidity providers prepare. The spread begins to widen 10–30 minutes before the release as algorithms and human traders position defensively.

Surprise shocks — a geopolitical crisis, a central bank official’s unexpected resignation, a corporate default — produce an even more violent spread widening. Because no one was expecting the news, there is no pre-positioning. The first reaction from liquidity providers is to pull orders entirely (disappear from the market) and then re-quote at much wider spreads once they have clarity.

During the March 2020 COVID-19 shock, for example, spreads on major currency pairs spiked from 1–2 pips to 5–10 pips or more. Some liquidity providers halted quoting altogether. This is the extreme case: when uncertainty is very high and no one knows the new equilibrium price, providers simply exit until they can re-calibrate.

How Liquidity Providers Manage Uncertainty

A liquidity provider’s spread reflects its cost of capital, operational costs, and a buffer for risk. During a news event, the risk component grows because the provider is blind to the true direction of the market.

Imagine a bank’s currency desk sees a large buyer of EUR/USD (euros against dollars) arriving. In a calm market, the desk can immediately find a matching seller in its internal inventory or from other banks and pocket a small spread. But if key US employment data is being released in two minutes, the desk has a problem: is the buyer betting that US employment will be weak (making euros more attractive relative to dollars), or is the buyer simply rebalancing? If the employment number comes in strong, the dollars will rally, and the desk will have bought euros at what turns out to be the peak price.

So the desk widens its spread on the ask (the price at which it will sell euros to the buyer). It says, “Okay, I’ll sell you euros, but I need a wider margin because I’m carrying this position into a data event.” The spread is the insurance premium.

Price Discovery and Volatility

Spreads also widen because volatility is expected to increase. When traders expect a currency to move 50 or 100 pips (common for major news events), they are unwilling to execute in a tight market. A tight spread implies a calm market; a wide spread signals “expect sudden price swings.”

This is partly self-fulfilling: as spreads widen, trading becomes more expensive, which can dampen trading volume. Conversely, as the data point is released and uncertainty resolves, traders return, the spread tightens, and volume surges. Many traders specifically avoid trading in the moments just before news and jump in once the number is published and the new price is established.

Price discovery — the process of arriving at a new equilibrium price — is expensive. The wider spread compensates liquidity providers for the cost of being on the wrong side of that process. Over time, wider spreads during news also discourage speculative trading during the blackout period, which can reduce destabilizing order flow.

Duration and Return to Normal

The spread widening lasts only as long as the information event is unresolved. For a central bank interest-rate announcement, the spread often widens 5–10 minutes before the announcement and then returns to normal 30–60 seconds after the decision is published and initial trades digest the news.

For non-farm payroll, the same pattern holds: spreads expand in the minute before the release, spike even wider for 10–30 seconds as the number prints and traders react, then gradually tighten over the next few minutes as the market reprices and equilibrium is re-established.

Gradual tightening reflects the restoration of confidence. As more trades occur at the new price, liquidity providers gain confidence that their new bid-ask prices are fair. They begin to narrow the spread slightly, attracting more traders, which further confirms the new equilibrium. Within 10–15 minutes, spreads on major pairs typically return to pre-event levels.

Practical Implications for Traders

For active traders and corporate treasuries, the message is clear: trading across a news event is expensive. If you must execute currency trades around scheduled releases, expect to pay 3–5 times the normal spread. A 1-pip normal spread might become 5 pips for 30 seconds around the news.

For corporations with rigid settlement timelines, this cost is unavoidable: a payment that must be made on a certain date cannot be delayed for a news event. But treasury teams typically avoid big forex purchases just before major releases if they have flexibility. Waiting 30 minutes for spreads to normalize costs less than trading through the event.

Some market makers and prop traders try to exploit the pattern by predicting the data, taking positions before the release, and capturing the spread tightening afterward. This requires accurate forecasting and tight risk management, as you are betting against information advantage — the official release is always correct, and you may be wrong.

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