The Role Of Economic Data Releases In Forex Profit Potential – News trading is becoming increasingly popular among Forex traders because it offers the opportunity to make large profits in a relatively short period of time. However, just as not all fingers are created equal, not all macroeconomic news has the same effect on the market. For example, the German Flash Manufacturing PMI will always have a greater impact on the Euro than the French Flash Manufacturing PMI. If you open an economic calendar, you can see which news has the most impact on the market and others. For example, if you’re trading the Australian dollar, you can ignore the Conference Board’s monthly leading index, as it barely moves the price of AUD/USD or AUD/CAD. the movement is unlikely to change the prevailing trend. Compared to less influential news such as the CB Leading Index, the Australian unemployment rate or the overnight cash rate set by the Reserve Bank of Australia (RBA) will have serious implications for AUD/USD and other currencies. Australian dollars. So, how do you know which news event to watch out of hundreds of reports? The good news is that, just like the Pareto principle, only a few news items account for the majority of the price movement in most currency pairs. Some of these news events are common to almost all currencies, and if you can understand how they affect your favorite currency pairs, you’ll be a better trader than most novice traders who only look at the charts. #1: Unemployment One of the main responsibilities of central banks around the world is to keep unemployment low. All major monetary policy decisions by any central bank are to keep it close to the non-accelerating NAIRU rate of unemployment. Every major economy releases statistics on unemployment rates every month, and as it falls; the better the currency rating. In part, when the unemployment rate falls below the NAIRU, which is always around 4.0%, central banks start raising interest rates to reduce inflation and cool the economy. Expectations of rising inflation and rising interest rates are strongly correlated with low unemployment. Therefore, the unemployment rate is a leading indicator for future monetary policy decisions. Figure 1: Unemployment rates in the UK and the European Union Currently, the unemployment rate in the EU is much higher than in the UK. So a simple analysis would show that the Euro is valued higher than the British Pound (EUR/GBP). If you’re looking at the consensus forecast that the EU unemployment rate will fall next month, and that it will remain unchanged in the UK, you can see that as bullish news for EUR/GBP. #2: Gross Domestic Product (GDP) Growth Rate Gross Domestic Product (GDP) is like a game score sheet. It measures the overall health of the economy, and the higher the GDP growth rate, the stronger the currency. If you are trading GBP/USD, you can easily see which way the pair will move in the coming weeks by watching the US and UK GDP growth. Figure 2: US and UK GDP growth rates Figure 2 shows that US GDP growth rates are generally close to those of the UK. However, often one overtakes the other. When you see that US GDP growth is higher than the UK growth rate, you can interpret this as a bearish signal for GBP/USD. Similarly, if you see forecasts of New Zealand’s GDP growth falling relative to the UK’s, this is a bullish signal for GBP/NZD. Figure 3: GDP data release leads to unexpected price increases #3: Consumer Price Index (CPI) The Consumer Price Index (CPI) measures the rate of inflation in an economy relative to a base year. You don’t need to be an economist to understand how inflation affects a given currency pair, but some basic concepts will help you go the extra mile. Most central banks have a monetary policy that attempts to limit the rate of inflation to a predetermined range. When inflation rises above this limit, central banks often raise interest rates to reduce inflation. Most central banks try to limit the inflation rate to 2.0% and use the CPI to measure this. However, the Federal Reserve, the US central bank, uses the Consumer Expenditure Index instead of the CPI. So, if you’re trading the US dollar and want to predict future interest rates, use the PCE index. However, whenever you see a CPI rise forecast, it will be bullish news for the currency. For example, if the UK CPI forecast remains at 2.5% for the quarter and the Australian CPI remains at 1.5%, it will have a bullish effect on GBP/AUD. #4: Overnight Interest Rates You see, banks lend money to each other, but they do so overnight. Central banks attempt to influence the overnight rate by lending to the money market at their overnight rate, an important tool in their monetary policy arsenal. Overnight rates are the main reason for price volatility in the market as they affect the swap rate. In fact, many traders think that the main purpose of fundamental analysis is to predict future interest rates from major central banks. Monetary policy is difficult to understand, but even for veteran economists, the way the news is interpreted is very simple. If you look at predictions that the Federal Reserve is likely to raise overnight rates, that’s likely to have a bullish effect on the USD. For example, if the Bank of Japan keeps rates unchanged, that would be bullish news for USD/JPY. #5: US nonfarm payrolls (NFP) data. The nonfarm payrolls index measures the number of jobs added in the US corporate sector from the previous month, an important leading indicator of the nation’s overall employment situation. Figure 4: Impact of non-farm payrolls data on EUR/USD. The US dollar is the world’s de facto reserve currency, and nonfarm payrolls are usually released by the US Bureau of Labor Statistics (BLS) on the first Friday of each month. ). Not every economy has the same data, but keep an eye on US NFP as it will have a big impact on almost every currency pair linked to the US dollar. If you see the NFP forecast higher than last month, that’s bullish news for the USD. For example, it will have a bullish effect on USD/JPY and a bearish effect on EUR/USD. #6: Organization of the Petroleum Exporting Countries (OPEC) OPEC is essentially an international cartel. OPEC countries consist of more than 15 crude oil producing countries such as Saudi Arabia, Kuwait and Iran. Currently, OPEC countries control about 44% of the world’s crude oil production, and decisions to increase or decrease crude oil production can have a major impact. impact on global energy markets. Because of how resources are allocated, there is a strong correlation between the currency market and oil prices. Therefore, it can affect the balance of trade (BOT) of the currency and affect the sentiment of the market. With this effect on oil prices, OPEC decisions can move the currency market as they affect global production, and as a Forex trader you should keep a close eye on what OPEC is doing. You see, crude oil is priced in US dollars because it is the de facto reserve currency. Therefore, any national currency of a country with large reserves of crude oil will affect the price of crude oil. Furthermore, lower energy prices will leave consumers with more income, which will create demand for goods and services and increase sales. Thus, increasing OPEC production tends to increase GDP growth in the US, which has vast oil reserves. However, since Japan does not have large oil reserves, this may not affect the Japanese yen much. In this case, USD/JPY will rise, as a cut in oil production will be bullish news for the USD. Analyzing the impact of oil prices on a currency is difficult, but knowing and understanding the impact of reading detailed analysis can help you feel market momentum and make better trades.
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