There is a wide range of factors that can affect the price of any given currency pair, and it is impossible to account for every possible variable. However, there are certain key events that practically all forex traders need to pay attention to, as these events can have a ripple effect on the entire economy. Here are some of the major events that can have an impact on the prices of forex pairs .
Elections & Political Events
Elections can have a significant impact on a country’s currency. Some parties might be seen as more conservative and fiscally responsible, while others as more democratic and amenable to spending. Generally, elections can be accompanied by increased market volatility.
Macroeconomic Data
Macroeconomic data is the most important and heavily relied upon information when it comes to forex trading. This is because it is the data which is most pertinent when it comes to the strength of an economy, i.e., what the currency valuation essentially is. You can find this data using the Economic Calendar. Popular macroeconomic factors include:
Interest Rates
The interest rate of one country relative to another is one of the most important criteria in determining an exchange rate. A higher interest rate will often lead to an appreciating currency.
Inflation Rates
Two of the most-watched inflation rate indicators are the Consumer Price Index (CPI), a weighted average of prices of a basket of consumer goods, and the Producer Price Index (PPI), an average of changes in the prices received by domestic producers for their output. Low inflation can force central banks to cut interest rates in the country, ultimately leading to a weaker currency.
Employment Rates
News concerning the rate of employment in a particular country often determines how strongly the country’s economy is viewed. A higher employment rate will often mean a stronger currency. In the USA, the Non-Farm Payrolls (‘NFP’) – a report on the country’s official employment data – is released on the first Friday of every month.
Sentiment Surveys
Sentiment surveys are a rough gauge of market expectations. For example, Consumer Sentiment is a closely watched indicator of future retail spending intentions. Most advanced countries will release Purchasing Managers Indices (PMIs) on a periodical basis. PMI is closely watched to determine future business spending intentions.
Gross Domestic Product
GDP is the overall growth of a country’s economy and is ordinarily followed by FX traders. Housing reports, employment figures and inflation rates all play an important role in determining a nation’s GDP.
Economic Statistics and Forex
Economic reports are the backbone of a forex trader’s playbook. Maintaining an economic report calendar is crucial to staying current in this fast-paced marketplace. Gross domestic product (GDP) may be the most visible economic statistic, as it is the baseline of a country’s economic performance and strength. GDP measures the total output of goods and services produced within an economy. However, it is crucial to remember that GDP is a lagging indicator. That means it reports on events and trends that have already occurred.
Inflation is also a significant indicator, as it sends a signal of increasing price levels and falling purchasing power. However, inflation is a double-edged sword. Many view it as placing downward pressure on a currency due to retreating purchasing power. Inflation can also lead to currency appreciation, as it may force central bankers to increase rates to curb rising inflation levels. Inflation is a hotly-contested issue among economists, and its effects on currencies are rarely straightforward.
Employment levels, retail sales, manufacturing indexes, and capacity utilization also carry important information on the current and predicted strength of an economy and its currency. They can provide confirmation for the primary factors we’ve outlined above.
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