Fundamental Analysis – Economic News That Influences Markets
Trading is the result of two major analysis types: technical and fundamental analysis. The technical approach is the one that deals with charts and the idea is to project future price levels based on chart patterns, historical behavior, etc. But technical analysis is not enough. There are traders that base their decision to buy or sell a specific currency or a specific currency pair on other factors, other than technical analysis. Anything that is not related to the technical analysis part of the trading decision, must be fundamental. Currencies are paired on the Forex dashboard with the idea that they are moving based on the economic differences between the two economies they represent. Therefore, if an economy is doing 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 next time the governing body is meeting, it will act on the interest rate. This makes the currency move and, consequently, the currency pair move. This is fundamental trading and macroeconomic, as well as microeconomic factors drive prices as well.
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Economic News to Watch
Have you ever wondered why the market is moving so violently when the 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 economy it refers to, hence the currency that is going to be influenced by its release
- Its importance
- The time the news is released to the public
The image above shows how the economic calendar is looking 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 in time, just select a different period ahead, like 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 too and the currency that is going to be affected. Careful here: if the currency is going to move based on the economic news, it is going to move on ALL the currency pairs that are having that currency in their componence. Not only one or two of them! Then there’s a color code to be interpreted. With yellow the least important news is presented. By least important, it doesn’t mean that it is not part of the overall interpretation of an economy. It only means that the influence at that moment over prices is not expected to be significant. The news listed under the orange color are so-called 2nd tier data. While important, it is having a major influence of the Forex dashboard only when the actual is different than the forecast. The last columns on the economic calendar show the previous release (that can be one month old, or a quarter’s old, and so on), 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. Mostly, this is the information to be found on any economic calendar. The example used here is just a format, but any other format will have the same information, only differently presented.
It goes without saying that the events presented with the red color in the economic calendar are the ones that make the market move. These are events to be watched and portfolio needs to be adjusted accordingly. Most of the traders are looking only at these events and mark the dates of their release for adjusting the risk in their portfolio. Keep in mind that trading should be the result of both technical and fundamental analysis, and fundamental analysis is mostly adapting to the news that are hitting the wires monthly.
Central Banks Meetings
The most important piece of economic news to be found on the economic calendar is the central bank’s meetings. If anything matters for the way a currency is moving, it is the interest rate, and the interest rate is set by central banks. Depending on the jurisdiction, or country, or region, central banks are meeting on a regular basis to assess the monetary policy in that area. The meetings dates are known in advance and during the statement, release volatility reaches elevated levels.
The next red-color event in the order of their importance is the inflation data. Capitalism is based on economic growth because 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 with cutting or raising the interest rate. When this is happening, the currency market is moving aggressively. Therefore, knowing when inflation data is released and what the interpretation would be is key to correct positioning.
The unemployment rate, the initial and continuing claims in an economy, labor participation rate, Non-Farm payrolls, claiming count, etc., all these are jobs related data to be interpreted on 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 U.S. dollar as it is the world’s reserve currency. Therefore, every piece of economic data that comes out of the United States is influencing the way the dollar moves and the way the overall Forex dashboard is moving.
Purchasing Managers Index (PMI)
The PMI’s are released monthly and they are an early sign of the state of an economy. That is, an early sign if a sector is expanding or contracting, and the potential influence for the overall economy. To give you an example, if the PMI Services in the United Kingdom shows 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 having 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 the rates. Therefore, the PMI’s 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 market moves. The articles in this part of the Trading Academy will treat all these and more in details.
Recommended Further Readings
- Forex Trading – Explaining the Concept
– What is forex trading, generalities about trading the currency market.
- Why Trading Forex?
– Advantages and disadvantages of trading the currency market, what are trader’s expectations and what is a realistic approach to follow
- What is a Forex Broker and Types of Brokerage houses
– Explaining what a Forex broker is and does, how the business should be organized, and how many types of Forex brokers exist.
- Financial Products to Trade
– Different categories of financial products that a Forex Broker is offering for the retail clients, starting with the classical currency pairs, and continuing with commodities, CFD’s, indexes, etc.
- Forex Trading Sessions and Their Importance
– Explaining the differences between the three Forex trading sessions, what are their importance, ranking, etc.
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
Other Educational Materials
- “Economic forces and the stock market.” Chen, Nai-Fu, Richard Roll, and Stephen A. Ross. Journal of business (1986): 383-403.
- “Economic news and the impact of trading on bond prices.” Green, T. Clifton. The Journal of Finance 59, no. 3 (2004): 1201-1233.