Sentiment Derived from News Predicts EURUSD Movements

Abstract

In this research, we investigate how EURUSD reacts to short and long term changes in macro sentiment between the U.S. and the Eurozone. Sentiment is measured by assigning scores to macroeconomic and geopolitical events reported in the news. Overall, we find evidence that the EURUSD overreacts to daily changes in macro sentiment but underreacts to monthly changes. This phenomenon leads to a sentiment momentum effect. A contrarian strategy with a one-day holding period on EURUSD generates an average return of 7.2% per year with an Information Ratio of 0.75 after transaction costs. A momentum strategy with a 1-month holding period generates an average return of 3.3% per year with an Information Ratio of 1.60 after transaction costs.

Keywords: EURUSD, RavenPack, news analytics, sentiment, reversal, momentum, macro, Forex, FX

JEL Classification: F31