Abstract

We study how macroeconomic news drives exchange rate dynamics. We construct market-based surprise measures from bilateral exchange rate movements over daily windows around CPI releases and monetary policy announcements in Norway, the euro area, and the United States, capturing news at the time it reaches financial markets. We combine these announcementinduced movements into relative inflation and monetary policy surprises for EURNOK and USDEUR, incorporating information from both economies underlying each exchange rate. Using these measures as external instruments in a proxy SVAR, we identify relative inflation and monetary policy news and trace their dynamic effects on bilateral exchange rates. The two identified news factors jointly account for roughly 70–80 percent of EURNOK forecast-error variance and 60–70 percent of USDEUR forecast-error variance at the reported horizons. The estimated responses are consistent with exchange rates adjusting to revisions in expected future interest rate differentials.