Fundamental Analysis – Economic News That Influences Markets

Trading is the result of two major types of analysis: technical and fundamental analysis. The technical approach is the one that deals with charts, the idea being to project future price levels based on chart patterns, historical behaviour, etc. Technical analysis is not enough, though. There are traders who base their decision to buy or sell a specific currency or a specific currency pair on factors other than technical analysis. Anything that is not related to the technical analysis part of the trading decision must be regarded as fundamental. Currencies are paired on the Forex dashboard with the idea that they move based on the economic differences between the two economies they represent. Therefore, if an economy is performing better than another one, and their currencies are paired, a comparison is possible. If the economy is doing better, it means the central bank will notice that, and the next time the governing body meets, it will act on the interest rate. This causes the currency, and consequently the currency pair, to move. This is fundamental trading, in which macroeconomic as well as microeconomic factors drive prices.

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Economic News to Watch

Have you ever wondered why the market moves so violently when specific economic news is released? Is there any specific reason behind a strong Forex move? The answer is yes, and this is related to the economic news that is part of the day-to-day economic calendar.

Introducing the Economic Calendar

The economic calendar contains the economic data to be released in the period ahead. Everyone interested in trading the Forex market should know the economic calendar for the period ahead. The news that makes the calendar is grouped into different categories, based on the following:

economic news -1
The image above shows what the economic calendar looks like. The information is to be found for free; just open an Internet browser and search for the “Forex economic calendar” and you’ll find plenty of sources to access the calendar. The first column shows the date the news is going to be released. If you want to go further ahead in time, just select a different period ahead, such as a week or even more, and the news will be listed. The time and the currency that is going to be affected are next. This shows the economy the news is referring to, and the currency that is going to be affected. Care is needed here; if the currency is going to move based on the economic news, it is going to move on all of the currency pairs that have that currency in their componence – not just one or two of them! Then there’s a colour code to be interpreted. With yellow, the least important news is presented; although by least important, it doesn’t mean that it is not part of the overall interpretation of an economy. It only means that its influence on prices at that moment is not expected to be significant. The news listed under the orange colour is so-called second-tier data. While important, it only has a major influence on the Forex dashboard when the actual news is different from the forecast. The last columns on the economic calendar show the previous release (that can be a month old, or a quarter old, etc.), the forecast for the current one, and the actual release. Even a short description of the release and its potential influence is to be found in every economic calendar. This is more or less the information to be found on any economic calendar. The example used here is just one format, but any other format will have the same information, only presented differently.

Red-Coloured Events

It goes without saying that the events presented in red in the economic calendar are the ones that make the market move. These are events to be watched, and the portfolio needs to be adjusted accordingly. Most of the traders only look at these events, and mark the dates of their release in order to adjust the risk in their portfolio. Keep in mind that trading should be the result of both technical and fundamental analysis, and fundamental analysis mostly involves adapting to the news items that hit the wires monthly.
Meetings of Central Banks 
The most important piece of economic news to be found on the economic calendar relates to the central banks’ meetings. If anything matters for the way in which a currency is to move, it is the interest rate, and the interest rate is set by the respective central banks. Depending on the jurisdiction, or country, or region, central banks meet on a regular basis to assess the monetary policy in that area. The meeting dates are known in advance, and during the statement’s release, volatility reaches elevated levels.
Inflation Data
The next red event in order of importance is the inflation data. Capitalism is based on economic growth as a result of of a controlled inflationary level. Lack of inflation is a problem, as well as too much of it. The central banks will react to both these situations by either cutting or raising the interest rate. When this happens, the currency market moves aggressively. Therefore, knowing when inflation data is to be released, and what the interpretation might be, is key to correct positioning.
Jobs Data
The unemployment rate, the initial and continuing claims in an economy, labour participation rate, Non-Farm payrolls, claiming count, etc., are all examples of jobs-related data to be interpreted for all economies. If the currency is important on the Forex dashboard, the market will move aggressively. This is especially true in the case of the US dollar as it is the world’s reserve currency. Every piece of economic data that comes out of the United States therefore influences the way the dollar moves, and hence the way the overall Forex dashboard moves.
Purchasing Managers’ Index (PMI)
The PMIs are released monthly, and they are an early sign of the state of an economy. That is, an early sign of whether a sector is expanding or contracting, and a potential influence on the overall economy. To give you an example, if the PMI (Services) in the United Kingdom shows that the services sector is expanding constantly, traders will start positioning on the long side of the GBP, or buying the pound. This is because the United Kingdom is a service-based economy, and this is an early sign that the economy is growing. If the economy is growing, the central bank will notice that, and will start to adopt a hawkish tone (which is bullish, or positive for the currency); and, in the end, if things persist on the same path, it will raise its rates. PMIs therefore have the power to predict future monetary policy changes that may come from a central bank.

These are only a few examples of the economic data that makes the market move. The articles in this part of the Trading Academy will cover all of these in greater detail.

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