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The Most Important Forex News Compiled by Opewins
The Most Important Forex News Compiled by Opewins
The Most Important Forex News Compiled by Opewins
Opewins
News trading has been becoming increasingly popular among Forex
traders because it offers opportunities to make large profits within a
relatively short period of time. However, just like not all fingers are not the
same, not all macroeconomic news events have a similar impact on the
market. For example, the German Flash Manufacturing PMI will always
have more impact on the Euro compared to the French Flash
Manufacturing PMI.
If you have opened an economic calendar, you can already see which
news higher impact on the market and others that you can easily ignore.
For example, if you are trading the Australian Dollar, you can easily ignore
the Conference Board’s month-over-month Leading Index reading, as it will
hardly move the price of AUD/USD or AUD/CAD, and even if it does, the
movement will probably not change the prevailing trend.
Compared to low impact news like the CB Leading Index, the
unemployment rate of Australia or the overnight cash rate set by the
Reserve Bank of Australia (RBA) will have a severe consequence on the
rate of AUD/USD or any other currency pair involving the Australian Dollar.
So, out of the hundreds of news releases, how do you know which news
events you should keep an eye on? The good news is, just like the Pareto
principle, only a handful of news releases are responsible for the bulk of the
price movement for most currency pairs. Some of these news events are
common for almost all currencies and if you can just understand how these
affect your favorite currency pair, then you will be far ahead as a trader
than most novice traders who are only looking at a chart.
One of the key responsibilities of the central banks around the world is to
maintain a low unemployment rate. All of the major monetary policy
decisions taken by any central bank is to keep it near the Non-Accelerating
Inflation Rate of Unemployment or NAIRU.
All the major economies release unemployment rate statistics on a monthly
basis and the lower it goes; the better the currency’s valuation becomes.
Partly because when the unemployment rate goes down below NAIRU,
which is always near 4.0%, central banks start increasing the interest rate
to reduce inflation and cool down the economy. This expectation of higher
inflation and higher interest rate is highly correlated with a low
unemployment rate. Hence, unemployment rate acts as a leading indicator
of future monetary policy decisions.
The Gross Domestic Product (GDP) is like the scorecard for a game. It
measures the overall health of an economy and the higher the GDP growth
rate, the stronger the currency would be. If you are trading the GBP/USD,
just by keeping an eye on the GDP growth of the US and the UK, you can
easily figure out which way the pair would move in the coming weeks.
Figure 2: GDP Growth Rate of the United States and the United
Kingdom
In figure 2, you can see the GDP growth rate of the USA usually mains
close to the UK’s. However, often one overtakes each other. When you see
the GDP growth rate of the USA is above compared to the UK’s growth
rate, you can interpret it as a bearish signal for the GBP/USD. Similarly, if
you see a forecast where the GDP growth rate of New Zealand going down
compared to the UK’s, it would be a bullish signal for the GBP/NZD.
Figure 3: GDP data release leads to a sudden price advance
The Consumer Price Index (CPI) measures the inflation rate in the
economy compared to a base year. You do not need to be an economist to
understand how inflation affects a given set of currency pair, but some
basic understanding would help you go the extra mile. You see, most
central banks have a monetary policy that tries to limit inflation rate to a
certain predefined range. When inflation goes above this range, central
banks usually increase the interest rate to curb down inflation.
Most central banks try to limit inflation rate to 2.0% and use the CPI to
measure it. However, the Federal Reserve, the central bank of the USA,
uses the Personal Consumption Expenditure index instead of CPI. So, if
you are trading the U.S. Dollar and want to anticipate the future interest
rate landscape, use the PCE index.
Nevertheless, anytime you see a forecast of growing CPI, it would be
bullish news for the currency. For example, if the forecast for CPI of UK is
2.5% for a quarter, and the CPI of Australia remains at 1.5%, then it will
have a bullish effect on the GBP/AUD.
You see, banks also borrow money from each other, but they do it on an
overnight basis. Central banks try to influence the overnight rate by lending
in the money market at their own overnight rate and it is an important tool in
their monetary policy arsenal.
Overnight interest rate is the key reason prices fluctuate in the market as it
also affects the swap rate. In fact, many traders think that the main purpose
of fundamental analysis is to predict future interest rates of major central
banks.
While understanding monetary policy is difficult, even for veteran
economists, the way to interpret this news is rather easy. If you see a
forecast that says the Federal Reserve will likely increase the overnight
rate, it will likely have a bullish effect on the U.S. Dollar. So, for example, if
the Japanese Central Bank keeps its rate unchanged, it will be a piece of
bullish news for the USD/JPY.
The nonfarm payrolls figure measures the number of additional jobs added
from the previous month in the corporate sector in America, which is an
important leading indicator of the overall employment situation in the
country.
Figure 4: Impact of the Nonfarm Payrolls Data on the EUR/USD
The U.S. Dollar is the de facto reserve currency in the world and the
nonfarm payrolls data is usually released on the first Friday of each month
by the U.S. Bureau of Labor Statistics (BLS). While there is not an
equivalent data release in every economy, you should definitely keep an
eye on the U.S. NFP as it will eventually have major impacts on almost all
currency pairs involving the U.S. Dollar.
If you see the forecast of the NFP is higher compared to last month, it is
bullish news for the U.S. Dollar. So, for example, it will be the bullish impact
on the USD/JPY and a bearish effect on the EUR/USD.
Retail sales reports are usually issued on a monthly basis and market
analysts consider it as a leading macroeconomic indicator. When
consumers feel safe and secure about their jobs, they tend to spend more
on durable and non-durable goods, which boosts transactions and creates
value. In terms, retail sales can be a pretty good indicator of future the GDP
growth rate.
The GDP, as we discussed earlier, is the ultimate indicator of a currency’s
strength. How retail sales are influencing it can give you an edge in the
market because you can predict GDP growth well before the quarterly
reports!
However, analyzing retail sales is somewhat tricky because it is also
dependent on wage growth and overall productivity level in the economy.
Therefore, before analyzing retail sales data, you have to keep in mind that
while increasing sales can lead to inflation, it can also indicate
overconfidence in the economy. After all, if productivity and wages are not
growing, but only retail sales go up, it can also indicate that people are
buying things to stock necessary items because they expect a slowdown in
the economy!
In the end, the rule of thumb is, if retail sales go up of one country and it is
the base currency of the pair, but it remains stagnant in another which is
the quote currency, it will be a piece of bullish news for the base currency.
There are many other economic indicators that you should understand and
incorporate into your fundamental analysis, such as the Purchasing
Managers’ Index (PMI), Housing Starts, Capacity Utilization Rate, and so
on. However, if you are just starting out and wants to feel the pulse of the
market, the 5 economic news releases we discussed should act as a good
starting point.