Why Forex Spreads Widen During News Events

The bid-ask spread in foreign exchange markets widens sharply when major economic data releases are published or geopolitical shocks occur, because market makers suddenly face heightened uncertainty about the true price and a reduced pool of counterparties. A normally tight 1–2 pip spread on EUR/USD can jump to 5–10 pips for seconds or minutes, then snap back, inflating trading costs and reducing liquidity precisely when traders most want to move.

How Market Makers Price the Spread

Under normal market conditions, a market maker in forex earns a living by buying (bid) and selling (ask) continuously, pocketing the spread. A market maker quotes EUR/USD at 1.0850 / 1.0851—they will buy at 1.0850 and sell at 1.0851, earning 1 pip per round-turn trade.

This is only profitable if three conditions hold:

1. Low inventory risk: The maker buys and sells in balanced flows, so they do not accumulate long or short positions.
2. Tight bid-ask range: Prices do not move wildly between the bid and ask; otherwise the maker is caught on the wrong side.
3. Fast turnover: Trades happen continuously, so the maker can close positions quickly.

When a news event approaches, all three conditions are threatened.

The Liquidity Drain

In the seconds before a major announcement—say, a U.S. Federal Reserve interest-rate decision or an employment report—many traders pause or step back. Large institutional algorithms stop posting orders. Smaller market makers widen their quotes or exit the market entirely. Bid and ask sizes (the volume available at each price) shrink visibly on trading screens.

This is rational behavior. Traders know that the news will move the market, and they do not want to be caught on the wrong side. A retailer who had been providing liquidity (selling to buyers, buying from sellers) suddenly does not want to commit capital until the news is out.

Result: The pool of willing buyers and sellers dries up. If you want to buy EUR/USD instantly, fewer people are willing to sell it to you at any given price. Market makers quote wider spreads—say, 1.0850 / 1.0855 instead of 1.0850 / 1.0851—to compensate for the reduced foot traffic and their exposure to inventory imbalance.

Increased Volatility and Price Uncertainty

Before the news, expectations diverge. Some traders expect a hawkish central bank, others bearish. Data surprises are common: an unemployment number can be 0.1% above or below the forecast, moving markets by 50–100 pips in seconds.

At the moment of the announcement, the market maker faces profound uncertainty about the true price. If they quoted 1.0850 / 1.0851 and a big miss triggers a 100-pip rally, the bid side (1.0850) is now massively underwater. The maker is holding a short position at the worst possible time, and the market is moving against them.

To protect against this scenario, market makers widen their spread. A 10-pip spread (1.0850 / 1.0860) gives them a cushion: if the price moves 5 pips in either direction immediately post-news, they can still manage their inventory and close the position at a lower loss.

This widening is a direct reflection of volatility and information asymmetry. The maker is saying: “I will take risk, but only if you pay me more for the spread.” From an economical perspective, the spread has widened because the expected loss from a single trade has risen.

Inventory Imbalance Risk

Suppose a market maker has been running balanced in EUR/USD all morning—roughly equal long and short positions. A central bank news event is about to happen. Both retail traders and algorithms expect volatility.

A few seconds before the announcement, the maker gets hit with a large buy order. Maybe it is 100 million EUR. Normally, they would sell instantly to dozens of counterparties and stay flat. Now, counterparties are gone. To close the position, the maker would have to sell at worse prices, or hold the long EUR position through the announcement and risk a larger loss if the currency drops.

This is inventory imbalance risk. The maker has acquired an unwanted large position with fewer exit routes. In response, they widen the ask (the selling price) to discourage further buys and encourage sells to help them get flat. The ask might jump from 1.0851 to 1.0860 or wider.

The Post-News Snap-Back

Immediately after the news, the spread often snaps back to normal levels within seconds or a few minutes. This is because:

1. Uncertainty resolves: The market now knows the news (e.g., the Fed raised rates by 25 bps). Traders can quickly update their prices.
2. Liquidity returns: Algorithms and market makers re-enter, confident that they now understand the true price. Bid and ask sizes swell.
3. Volatility subsides: The initial shock move tends to settle, and normal two-way trading resumes.

However, if the news is unexpected or market-moving, the repricing can take longer. In some cases—a major geopolitical shock, a bank failure, a central bank surprise—spreads stay wide for hours or days, reflecting prolonged uncertainty.

Different News Events, Different Spread Impacts

Not all news widens spreads equally. Scheduled economic releases (unemployment, inflation, GDP) are widely anticipated. Markets front-run the data; many trades are positioned ahead of time. When the data is released, the move is typically sharp but brief, and spreads snap back.

Central bank policy decisions (interest-rate decisions, new guidance) tend to cause larger spread widening because the market impact is often bigger and volatility can persist. A surprise rate hike ripples through multiple currency pairs and asset classes.

Geopolitical shocks (political crises, military actions, trade sanctions) are often truly unexpected. Spreads widen not for seconds but for minutes or hours, reflecting lasting uncertainty about consequences.

Retail vs. Institutional Impact

The widening spread hits retail traders disproportionately hard. A retail trader executing 100,000 EUR might face a 10-pip spread at the moment of announcement—a $1,000 cost on a single trade. An institutional trader with direct market access and relationships with multiple market makers might achieve a 5-pip spread for the same size.

Large hedge funds sometimes place orders before the news to lock in tight prices, then adjust positions after the announcement. Retail traders entering “at market” right at the announcement get worse prices because liquidity is scarce.

Strategies Facing News Events

Some traders avoid the announcement entirely: they simply do not trade in the 30 seconds to 2 minutes surrounding the data release. Others use limit orders (specifying a price, not guaranteed execution) to avoid the worst spreads. A few trade through the volatility, betting on the direction of the move and accepting the wider spread as a cost of entry.

Professional traders often observe that the true volatility—the actual price movement—is smaller than the spread widens would suggest. The spread is over-compensating because market makers are uncertain and conservative. This creates opportunities for those willing to accept the temporary illiquidity.

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