Market Events and Forex Trading
Forex currency trading is not just the largest financial market in the world, it’s also among the most volatile, with numerous events affecting different currency prices.
Many of these events are unpredictable in that no-one knows when they will occur. There are some events, however, which occur often, according to a set calendar. So although the results can be harder to predict, one knows that there will be results on that day and can thus plan accordingly. Macroeconomic releases fall into this latter category – in other words the publication of economic data related to a specific aspect of a country’s financial situation.
Many of these events have a proven track record in causing volatility – and traders have the distinct advantage of knowing the exact date and time that such figures will be released; usually on a monthly or quarterly basis.
Let us take a look at a few examples of important macroeconomic events which can have an effect on the FX markets;
US Nonfarm Payrolls/ Unemployment Rate
Usually released on the first Friday of the new month, this figure indicates the number of jobs outside of the farming sector which have been created in the previous month. The number is closely linked with the US unemployment rate figure, which is released at the same time.
Both numbers when taken together give an indication as to whether the world’s largest economy is growing or not. Before the actual release there is an official prediction by analysts as to what the NFP figure will be. If the actual figure is better than expected, USD often strengthens against other currencies. If the actual figure fails to meet the prediction, the Dollar can often weaken against FX counterparts.
Though other countries do not release a Nonfarm Payroll figure, they do release monthly unemployment figures, which can give an indication of the state of their economy and affect currencies accordingly.
Released on a quarterly basis, this figure gives an indication of a single nation or united economic zone’s financial health by calculating output and consumption values. An increase in GDP implies economic growth, whereas a decrease in GDP suggests economic contraction. Because this figure takes a significant amount of time to calculate, preliminary results are often published a couple of weeks before the full figures – they are known as ‘flash estimates’. By measuring a state’s economic health, GDP results can consequently have an effect on that country’s currency depending on the outcome.
Interest Rate Decisions
The central banks of each country (or economic zone) get together a number of times each year (usually monthly) to make a decision regarding interest rates. They can raise interest rates in an attempt to combat inflation, lower them to fight deflation, or keep them unchanged if they decide that’s the best course of action.
Generally, raising interest rates is a sign of a flourishing economy whilst lowering them is a sign of a weak economy (though raising interest rates can be used as a means to reign in spiralling inflation and lowering interest rates can help to combat recession – and can be seen by the markets in that light).
Markets always keenly watch the main central banks (especially the US Fed, the BoE and ECB) for an indication of changes to the interest rate, as any change can mean rapid shifts in the markets – not least of all in the Forex markets.
These are three of the main macroeconomic events which have the potential to significantly affect Forex markets. In future posts we’ll discuss other regular financial events which can have an effect on FX Currency trading.