The FX Market

Trading the forex markets requires not just knowledge about technical indicators but also the fundamentals. It is after all, the fundamental news that brings and changes the trends in the forex markets. As a result, traders should keep an eye out on fundamentals as well. You don’t need to study economics but following some of the major fundamental news events can help you to understand the forex markets better. Here are the top five economic indicators and reports that every forex trader should know about.

Gross Domestic Product or GDP

The Gross domestic product or GDP is unarguably, one of the biggest fundamental events that influences the currency markets. It is an economic indicator that measures the gross domestic product of an economy. The GDP report is usually released on a monthly and quarterly basis and can change from one economy to another. For example, countries such as Australia, New Zealand, the United States, Japan and the Eurozone release the GDP figures on a quarterly basis. On the other hand, countries such as Canada and the UK release GDP numbers on a monthly and quarterly basis. The GDP report is important because it shows the health of an economy. In a growing economy, the GDP tends to rise at a steady pace. Central bankers look to the GDP as one of the key economic indicators and based on this, monetary policy decisions are taken. Interest rates can either be cut or raised depending on whether the GDP is rising or falling.

Nonfarm Payrolls (NFP)

The one-minute EUR/USD chart below illustrates such a move. The blue vertical line marks the release of the Employment Situation report that was released on 1 November 2019. Notice how sharply the price moved in just one minute? Also, notice how much larger the average range of each bar becomes after the release of the report, compared to before. Source: MT 5 - EUR/USD M1 Chart - Data Range: 1 November 2019 12:59 PM - 16:19 PM GMT - Please Note: Forecasts such as this are not a reliable indicator of future results, or future performance.

 

Why does it have such a large effect on market prices?

Part of the answer lies in the timeliness of the report. The employment cycle and the business cycle are closely related and, historically, changes in nonfarm payrolls (NFPs) have moved along a very similar path to quarterly GDP changes. This close correlation means that payroll data can be used as a proxy for GDP. The crucial difference between the two is that nonfarm payrolls come out monthly, reporting on the month that ended just a few days before. In contrast, GDP is reported quarterly, and with a big delay. Another part of the answer is the impact the report has on monetary policy. Maximum employment and stable prices are two of the FED's (Federal Reserve) Three Monetary Objectives (these two key goals are often referred to as the FED's dual mandate). It follows then that employment data can have a serious effect on market perceptions of the future direction of monetary policy.

Federal Funds Rate

The Federal Open Markets Committee (FOMC) meets eight times a year as part of its regular schedule to determine US monetary policy. The outcome of an FOMC meeting can markedly affect the Forex market, should there be any disparity from the expected course. A key fundamental that drives Forex rates is the level of interest rates in the two countries involved, and the expectations regarding those interest rates. If the FED makes a change to the federal funds rate, or simply alters perceptions about the future course of monetary policy, it makes a difference to the US Dollar, the most important currency in the world. As part of the statement released after each FOMC meeting, the FED provides forward guidance about the expected path of monetary policy. This is a reasonably recent measure, aimed at providing greater transparency as part of an effort to reduce volatility in financial markets. As a consequence, changes in monetary policy are usually communicated to some degree in advance. This means that the forward guidance itself has the potential to move markets, just as much as an actual change in policy. A serious Forex or CFD trader will always ensure they are aware of the Calendar for FOMC Meetings.

Inflation Report

The inflation report is another important indicator that is used when determining interest rates. The inflation report or consumer price http://theforexcouncil.com/ measures the relative change in a basket of goods. Inflation can rise or fall for a number of reasons. Typically, inflation rises when there is too much demand for goods and services. This demand is created by increased money supply. As a result, the demand for goods and services tends to drive prices higher. However, it is not that straight forward. The value of the currency also plays a big role. When a currency's value falls, the cost of importing goods and services can increase. This in turn can create price pressures. Inflation is one of the key economic indicators that is used by central banks. Across many central banks, maintaining price stability or inflation is one of the mandates of the monetary policy.

Unemployment Rate

The unemployment or the labour market report gives the overall state of the labour market of the economy. This report measures the national unemployment rate, the number of jobs added during the reporting period and the pace of growth in wages. The unemployment report is released on a monthly basis and it is also one that attracts a lot of attention. The most famous of all the unemployment reports is of course the US non-farm payrolls report which is released on the first Friday of every month. This report brings short term volatility to the USD and therefore impacts every major currency pair. Maintaining low unemployment rates is also one of the mandates by many central banks. The Federal Reserve bank of the United States for example has a dual mandate to maintain price stability as well as targeting low unemployment rates.

Central Bank Meetings

Forex traders follow important central bank meetings for potential changes in their monetary policy. In the case of the US dollar, the Federal Open Market Committee (FOMC), which is a branch of the Federal Reserve, is in charge of the US monetary politics. The main role of the FOMC is to execute open market operations. This should change the available money supply through the buying and selling of government bonds. If the FOMC buys government bonds, the increased money supply will lead to a looser monetary policy and lower interest rates. Similarly, if the FOMC wants to tighten monetary policy and increase interest rates, it would sell government bonds and reduce the available money supply in the market. Since central bank meetings are generally secret in their character, many economic analysts try to expect their outcome.

Conclusion

Economic indicators and news reports often affect exchange rates immediately after they’re released. It’s not unusual for exchange rates to move hundreds of pips. Especially so if the actual released number differ to a large extent from market forecasts and Street expectations. Despite being micro-fundamentals, market reports can have a long-lasting impact on the Forex market. They influence macro-fundamentals and the equilibrium exchange rate between two currencies. That’s why all types of enjoy understanding the concepts outlined in this article. Short-term traders and scalpers can try to ride the high volatility that the release of these reports creates. Long-term traders can position themselves and tweak their Forex portfolio if market reports begin to affect underlying macro-fundamentals.