Why Forex Spreads Widen During News and Thin Liquidity
Forex spreads widen when liquidity providers require more compensation for quoting prices or reduce the volume they are willing to trade. This often happens around major data releases, unexpected political events and quieter market periods. A wider spread means that an immediate purchase costs more relative to an immediate sale, even before separate commissions or financing charges.
What is a bid–ask spread?
The bid is the price at which a liquidity provider is willing to buy the base currency; the ask or offer is the price at which it is willing to sell. Suppose EUR/USD is quoted at a hypothetical bid of 1.08000 and ask of 1.08012. The difference is 0.00012 USD/EUR, or 1.2 pips. A marketable buy generally trades at the ask and an immediate sale at the bid, assuming those displayed quotes are executable for the required size. The spread is thus an important component of round-trip execution cost, although prices can change between transactions.
Why do market makers widen quotes?
A dealer providing prices faces the possibility that counterparties know more than it does, that the reference market moves before it can adjust its inventory, or that offsetting orders are difficult to complete. During a surprise announcement, the future price distribution may become unusually uncertain. A wider spread compensates for adverse-selection and inventory risks. A dealer may also reduce quoted size instead of, or in addition to, increasing the spread. Displayed depth and spread therefore need to be interpreted together rather than treating the spread as the whole liquidity picture.
Worked example: the spread triples
Consider a fictional EUR/USD instrument with a pre-announcement spread of 0.8 pip. At a time of intense price discovery, that spread widens to 2.4 pips. On a conventional 100,000-euro position where one pip equals 10 USD, the spread associated with a hypothetical immediate round trip changes from roughly 8 USD to 24 USD, before separate charges. This simplified calculation assumes unchanged midpoint and full fills; real execution prices and depths are dynamic. A change in spread may overwhelm the intended profit from a short-term strategy based on only a few pips.
Economic releases and quote uncertainty
Inflation, employment and central bank decisions can alter the entire expected path of interest rates. When a release differs materially from expectations, orders can arrive faster than providers can update prices. CME Group’s analysis of FX price data describes spread widening around a major announcement and differences in how venues recovered after it. However, quoting behaviour is venue-specific: one trading pool may be more resilient than another, and historical examples are not forecasts for any future release.
Thin-liquidity periods and session handovers
Forex trades across a network of dealers and venues rather than a single global central order book. Activity varies through Asian, European and North American business hours. Around some daily rollover or handover periods, there may be fewer competing quotes and less risk appetite for large orders. Public holidays can reduce the availability of counterparties in a major market even when another centre remains open. A pair dominated by European and American flows may behave differently from AUD/JPY during Asian hours. Calendar conventions and daylight-saving adjustments also matter.
Volatility and spread are not the same thing
Volatility describes variation in price; spread describes the gap between simultaneous buy and sell quotes. They often rise together in stressful conditions, but they need not. A volatile, heavily traded market can maintain relatively competitive spreads, while an illiquid instrument may show a wide spread even without a large price change. A broker’s displayed candle high and low can depend on whether it charts bids, asks or last-traded prices. Stop triggers can therefore differ from a simplified midpoint chart.
Slippage and market impact beyond the spread
Even a narrow top-of-book spread does not guarantee low execution cost. If only a small quantity is displayed at the best offer, a larger market buy may fill at several higher levels. This is market impact or ‘walking the book’. Network latency can also mean that the quote changes before the order reaches the venue. To assess execution quality, compare the arrival-time market, average fill price, transaction size and available depth rather than focusing only on the headline spread.
CFDs, spot FX and futures quotes
Over-the-counter dealer products can involve provider-specific pricing and fees, while exchange futures follow an order-book and clearing model. A retail platform may advertise a typical spread during normal conditions; it does not follow that spread will remain fixed around a major event. Product terms should clarify the relationship between spreads, commission, overnight charges and execution policies. For UK retail CFD products, relevant FCA protections apply to in-scope offerings but do not remove market and execution risk.
How to evaluate spread behaviour
- Record normal bid and offer spreads for the specific product and session.
- Check whether the provider quotes executable sizes at those prices.
- Compare conditions immediately before and after major scheduled releases.
- Include commissions, slippage, conversion and financing when assessing total costs.
- Test any strategy under stressed spreads rather than only on stable historical midpoints.
Spread cost under normal versus stressed liquidity
For a 100,000-unit EUR/USD position, each pip is $10. The following values show how a wider quoted bid–ask spread can change the initial transaction cost even without a price forecast.
| Hypothetical EUR/USD quote | Quoted spread | Spread cost on €100,000 |
|---|---|---|
| Normal conditions | 1.2 pips | $12 |
| Thin liquidity before a release | 3.8 pips | $38 |
| Extreme news-window illustration | 8.0 pips | $80 |
| Increment from 1.2 to 8.0 pips | +6.8 pips | $68 additional initial spread cost |
A displayed spread is not a promise of full-size execution. Brokers may change quotes quickly, order books can thin, and stop orders may fill at prices outside a last-traded chart. The practical cost of a completed round trip also depends on bid/ask changes before exit, commissions and market impact. For a serious comparison, log contemporaneous executable quotes and fills rather than average daily published spreads.
Frequently asked questions
Do Forex spreads always widen when news is released?
No. The direction and size of the change depend on the surprise, venue, competing liquidity and timing.
Does a wider spread mean the market price is falling?
No. A spread can widen during rising, falling or unchanged midpoint prices.
Can a stop-loss fill at a worse price during news?
Yes. A stop-market order can experience adverse slippage when executable prices move rapidly.
Sources and further learning
See CME Group research on FX spreads and news, Market Liquidity Explained and Trading Costs Glossary.