This papers studies the high frequency reaction of the DEM/USD exchange rate to publicly announced macroeconomic information emanating from Germany and the U.S. The news content of each announcement is extracted using a set of market expectation figures supplied by MMS International. By using data sampled at a high (5 minute) frequency we are able to identify systematic impacts of most announcements on the exchange rate change in the 15 minutes post-announcement. The impacts of ‘news’ on the exchange rate, however, can be seen to lose significance very quickly when the observation horizon for the exchange rate is increased, so that for most announcements there is little effect of ‘news’ on the exchange rate change by the end of the three hours immediately after release. Both the responses to U.S. and German ‘news’ are broadly consistent with a monetary authority ‘reaction function’ hypothesis, i.e., the market expects the Fed or the Bundesbank to respond to ‘news’ on increased real activity, for example, by raising short term interest rates in order to head off the possibility of future inflation. Further, the use of German data allows us to examine two questions the previous literature could not tackle, because, unlike U.S. announcements, German announcements are not scheduled. First, we show that the time-pattern of the reaction of the exchange rate to the U.S. scheduled announcements is different from the reaction to the German non-scheduled announcements, the former being much quicker. Second, we are able to examine the effect on the exchange rate change of the proximity of other events to the announcement. Results show that German ‘news’ is most influential when released just prior to a Bundesbank council meeting. Finally, subsidiary results demonstrate the efficiency of the intra-day FX market with respect to these announcements and map the pattern of volatility these releases cause.
