To know why the market is moving in a certain way in the unpredictable world of Forex and be able to anticipate these moves is one of the major keys for successful traders. The reaction of the market to the world events fluctuates daily and experienced traders try to analyze future economic events in order to foresee currency movements.
Trader needs to anticipate what is going to happen in the event announcements and act right after the announcement is made.
On the whole, the biggest market-moving events tend to be the release of key economic data and the easiest way to manage what is going to be announced is to follow an Economic Calendar.
Before the internet revolutionized the trading map for independent online investors, professional day traders and economists had the advantage of receiving the data contained in these economic reports minutes or hours before everyone else. Nowadays, however, most traders simply look to Forex site to know in real time what was announced.
As we anticipated in a previous article, the economic calendar is a summary of the announcements of the week. These announcements lead to indicators that show the changes in the economy and politics of a country.
These indicators, which are the basis of any fundamental analysis, are distinct from the mathematical indicators used in technical analysis, which are calculated purely on the basis of price data and movements.
The key economic factors have a significant impact on currency pairs which can be forecasted by using economic calendar. This forecasting can predict the possible trend direction. We should know the effects of these key economic factors to predict the trend direction.
We wrote about the major indicator in a previous article; here we want to describe only how those key economic factors impact on Forex trends.
- Fiscal and monetary policy of a government: general economic conditions of a country help traders to compare between two currencies. Political unrest may play a negative role for the currency while stable political condition has a positive impact on the national currency. Talking about government budget, the Forex market will react to deficits and surpluses; a growing deficit will turn the market off to that currency. A country that lowers it deficits, or continues to grow on it is surpluses will find that the Forex market will react positively.
Interest rates: the announcement of a higher rate attracts investors which strengthen the currency of the country. On the other hand, if the currency of that country decreases, this is seen as negative in the Forex market. There will be a decrease in demand for that type of currency based on
- the perceived inflation rates.The high difference between interest rates attracts traders for carry trading. This indicator is very sensitive because Central Banks will try to play with interest rates in order to help stop inflation. Forex markets look for this intervention, as it means that they can get a currency for lower that will quickly rise once the central Bank steps in.
- Trade Balance: this is the ratio of the sum of the payments received from abroad and the sum of payments to foreign countries. Surplus or deficit in the trade account balance has a significant impact on the currency of a country. A surplus in the trade account balance indicates the strength of the country and its currency will do the same. Inversely, a deficit in the trade balance of a country indicates the weakness of the currency.
- Gross Domestic Product (GDP): a growing economy of a country strengthens the currency of that country and leads the currency to become stronger than other currencies.
- Employment: this major economic data comes in the form of jobless claims, payroll statistics and the unemployment rate of a country. When the country has an increasing percentage of its citizens employed, the currency will gather strength.
- Index of Consumer Prices, the most important indicator of inflation. A country reduces the interest rates to control the increase in inflation when the country is in inflationary economic cycle. Interest rates tightened with increasing inflation and it has a negative impact for the national currency.
- Retail Sales: the overall economy of a country boosts up with a strong retail sales figure. This situation plays a positive role for the strength of the national currency.
These factors are effective for short term trading as the trend is the most important thing for trading whether it is short or long term trading.
Depending on how market participants interpret a given indicator, an exchange rate may swing either way. This swing may either reinforce or adjust an existing trend, or even start a new one.