Relative macro news explains 70 to 80 percent of EURNOK variance
Relative inflation and monetary policy announcements account for 70 to 80 percent of EURNOK forecast-error variance and 60 to 70 percent for USDEUR, according to a Norges Bank study by Karsten Gerdrup, Kristoffer Hallerud, and Nicolò Maffei-Faccioli.
Immediate repricing across currency pairs
The researchers examine bilateral exchange rate movements around consumer price index releases and central bank policy decisions across Norway, the euro area, and the United States from 1999 to 2025.
Using daily and 30-minute event windows in a proxy SVAR framework, the paper isolates relative announcement surprises.
High-frequency tick data reveal that exchange rates adjust within the first minute of scheduled releases.
Together, relative inflation and monetary policy news explain 71 to 81 percent of EURNOK forecast-error variance and 61 to 67 percent of USDEUR variance across horizons up to 24 months.
Inflation news accounts for 29 to 39 percent of EURNOK variance on its own.
Transmission through interest rate differentials
The study demonstrates that currency adjustments reflect revisions to expected interest rate differentials rather than contemporaneous policy decisions alone.
Both shocks raise the two-year swap-rate differential and appreciate the domestic currency.
However, broader financial responses diverge: inflation surprises elevate equity prices and lower global economic policy uncertainty, whereas monetary policy shocks depress equities and increase uncertainty.
Sound mechanism, circular proxy risk
Constructing proxies from exchange rate returns risks inflating explanatory power.
Robustness tests with interest rate differentials yield lower but still sizeable variance shares.
The findings demonstrate that inflation data move currencies just as forcefully as policy rate decisions.
Source: Macroeconomic news and exchange rate dynamics
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