The payoff in forex trading comes when you correctly predict the price movement of a currency pair.
Currencies are tied to economies of specific countries. The USD is largely influenced by events taking place in the US economy. You make a profit each time there is a market movement by taking a long or short position. Economic releases drive price action.
Now, there are two main ways of analyzing the markets when trading currency derivatives. You may be already familiar with:
· Technical analysis: Studying price charts of historical trading data to forecast upcoming price movements. You use technical indicators such as oscillators, trend lines, moving averages, volumes, etc.
· Fundamental analysis: Traders focus on the bigger picture to determine the value of a currency. They consider news releases that reveal the health of the economy, major events, and decisions. For instance, how will the rising unemployment rates in the US influence the price of the dollar? What is the effect of political decisions, leadership, instability, geo-politics, or national disasters? All these drive market movements because traders react to them.
At the present moment, the COVID-19 crisis has proved to many traders the value of trading the news. The pandemic will continue playing a big role in the forex market. Traders will anticipate and react to vaccine releases, new treatment options, government policies to rescue the economy, stimulus packages, etc.
Part 1: Introduction to the Economic Calendar
A forex economic calendar is a useful tool in fundamental analysis because it makes analyzing markets based on macro factors easier. Think about it, there are hundreds of economic events taking place in the market at any given time.
It would be so difficult to keep track of what’s happening without a specialized tool that aggregates all the events into one place.
1.1 What is the economic calendar?
It can be described as a listing of upcoming releases of economic events.
Who makes the economic releases? Various financial organizations, banks, councils, government institutions, and central banks.
Sources of information and reports are considered as “resources.” The Federal Reserve Board of Governors is a key provider of reports, such as the Industrial Production (MOM) figures.
The Bank of England is another major resource featured in the forex calendar UK. Traders closely watch its interest rate decision and speeches by its governor, Andrew Bailey.
1.2 Who creates and analyzes economic calendars?
Economic calendars are created by teams of economists, analysts, and journalists working at financial institutions, trading brokers, banks, government institutions, etc.
They compile a list of all upcoming events for a particular country, entity, or commodity. Analysts make predictions about the nature of the upcoming announcement. For instance, they may predict that 300,000 jobs will be added to the UK economy in September 2020.
Estimates from various analysts are compiled and a consensus figure published in the global economic calendar. Actual figures may differ or agree with the consensus.
1.3 Impacts of economic announcements
Not all events carry the same weight or effect on the markets. A statistical release about the number of visitors coming into a particular country may not have the same impact as a change in the interest rates.
Each investing economic calendar has a volatility index with three ratings:
· Three stars, Red, or High impact: Likely to cause high volatility in the market.
· Two stars, Orange, or Medium impact: May have a moderate impact on prices.
· One star, Yellow, or Low impact: Least likely to drive price volatility.
1.4 Global economic calendar examples
Let’s start by looking at screenshots of an economic calendars:
a) Myfxbook
Myfxbook has one of the most popular economic calendars. It’s free for use by retail forex traders regardless of the platforms they use. You only have to deal with ads.
1.5 Features to consider when choosing an economic calendar
Look out for the following features:
· Custom filters: The calendar should allow you to filter events based on their impact, time frame, country, etc.
· Historical graph: It allows you to view historical releases and trends. You can determine the impact they had on the prices by examining price movements on corresponding release dates.
· User account and notifications: If you’re planning to use a third-party calendar, it should permit you to create a user account to save preferences. Check the notification options for upcoming events.
· Local time: The calendar must display upcoming events in your local time zone. It’s a basic feature in most calendars.
· News and in-house analysis: Platforms with in-house advisory teams prepare quick summaries of anticipated moves and inform traders how to respond.
· Event countdowns: Knowing the time left until the event starts is useful. You can gauge the changing volatility leading up to the event. For instance, is the market bullish or bearish before an official release?
1.6 How to spot a trading opportunity
Fundamental traders look for discrepancies between the value of a currency and its current price. If the currency has a high price, but indicators point to the economy worsening, the trader may choose to sell the currency.
Let’s take this further by explaining using an example:
Before the non-farm payroll report was released on September 4th, 2020, the market consensus was that about 1.4 million jobs would be added to the US economy. The actual value was 1.371 million jobs, and the unemployment rate fell to 8.4%.
You should then ask: what is the significance of more jobs being added to the US economy?
The initial market reaction saw the US dollar index gaining by 0.12%. Stock prices also soared.
This is one perfect example of fundamental analysis working for the retail trader. But note that events don’t influence currency markets as anticipated. It’s vital to have an established Forex strategy.
Part 2: The Key Role of inflation and Interest rates in the Economic Calendar
All economic events collectively inform the interest rate for a given currency. For instance, the USD interest rate is 0.25% compared to 0.1% for GBP.
Investors can count on receiving this return for investing in the named currencies. The country’s central bank determines the monetary policy by setting the interest rate.
If the central bank chooses to provide a high-interest rate, its currency is expected to become stronger. High-interest rates encourage people in foreign countries to invest in the said currency driving its value.
Falling rates make holding a particular currency unattractive, and therefore, its value may decrease.
Central banks are also keen on inflation. Basically, when you can get fewer consumer goods with the same value of money, it means that the currency has weakened and inflation is rising.
Central banks can control inflation by changing interest rates. For instance, they may increase interest rates, making it attractive for people to deposit money into savings accounts instead of reinvesting.
The subsequent reduction in the demand for consumer goods may cause prices to fall, in turn lowering inflation. Reducing interest rates encourages people to borrow and spurs economic growth.
Part 3: Major Events in a Forex Calendar
As a forex trader, you are practically dealing with currency pairs from different countries. Therefore, your main focus should be on the indicators that showcase the economy’s performance and stability. Strong and upbeat economies should have stronger currencies.
1) Job numbers
Economies thrive when many people are employed and productive. Changes in the employment rate is a closely tracked statistic. For instance, if the unemployment rate is rising, more people will lack the purchasing power to acquire consumer goods.
There will be low output to match decreased demand, meaning the economy will operate below its full potential. Unemployment may signal a recession as companies choose to lay off workers to survive in low output periods.
How job numbers affect forex markets:
If more people earn a paycheck, collective purchasing power increases. It may drive inflation upwards. The central bank may respond by raising interest rates to encourage people to save.
The number of jobs added or lost is another closely tracked metric that indicates changes to the economy’s growth.
Examples of job number releases
1. Nonfarm payroll – United States: The release takes place on the first Friday of every month. It focuses on the number of jobs added or lost. If a high-volume of jobs are added, it tends to have a bullish effect on the USD. The US Bureau of Labor Statistics makes the release.
2. ILO Unemployment Rate – United Kingdom: The rate ascertains the percentage of unemployed workers compared to the general workforce. An increase in this rate means that the UK economy is weakening. Therefore, traders may react by shorting the GBP. The National Statistics releases the figure. Another critical release tied to job numbers in the UK is the Claimant Count Change.
3. Unemployment Rate s.a. – Australia: It’s also a highly anticipated economic release that points to the expansion or shrinkage of the Australian labor market. An increase in this rate may be deemed a negative signal by traders resulting in bearish markets. The Australian Bureau of Statistics publishes the report.
2) GDP – Gross Domestic Product
It attaches a cumulative monetary value to all goods produced and services rendered in a particular country during a given period. The interest payments to and fro the country may also be factored. GDP releases occur every quarter, and each release may be denoted as Quarter 1 (Q1), Quarter 2 (Q2), etc. in the forex calendar.
How GDP releases affect the markets
The release is marked by a significant increase in the volatility of the currency since it reveals the rate of growth of the economy.
Analysts compare the release with prior quarters over several years to determine whether the economy is speeding up or slowing down.
Increases in the GDP value are tied to business spending, government spending, and private consumption. Fundamentally, a growing economy will have a positive correlation on its currency.
Examples of GDP releases
The gross domestic product releases are easy to spot and available for all countries and currencies. For instance, for the UK economic calendar, the release is made by the Office for National Statistics quarterly.
3) Consumer Price Index (CPI)
The release considers the average price of a basket of goods and services typically needed by the average urban dweller. It essentially points to the cost of living.
How does the CPI affect the currency market?
The CPI calculation is useful since it factors the volatile prices of food products and energy. Rapid and extreme changes may hurt the economy, whether consumer prices rise or fall. Negative inflation (deflation) is also considered harmful.
If the CPI value goes up, it may indicate that inflation is rising, and central banks may respond by raising interest rates. Therefore, a high CPI may foreshadow a potential rise in the value of a particular currency.
Examples of consumer price indexes
1. Consumer Price Index ex Food & Energy – United States
2. Consumer price index (Eu Norm) – France – It’s thought to have a low-impact on the Euro.
3. Retail price index – United Kingdom – It may have a moderate impact on the GBP. Also, factor the Core Consumer Price Index that includes food and energy costs when analyzing the UK economic calendar.
4) Retail Sales
The volume of retail sales is the best indication of consumer spending as it relies on looking at receipts issued by traders.
Changes in retail sales are expressed as percentages. If more consumer goods have been supplied in a given year or month, there is positive retail market growth and consequent economic prosperity.
How do retail sales releases affect the markets?
An increase in the percentage of retail sales is thought to correlate to the currency value positively.
Examples of retail sales:
Retail sales announcements with a high-impact include the following countries: China, United States, United Kingdom, Canada, Germany, Eurozone (YoY), and Australia.
5) Purchasing Managers’ Index (PMI)
The PMI utilizes the expertise and knowledge of industry experts. They shed light on their outlook on the prevailing market conditions, particularly in manufacturing.
Most of the professionals in these surveys are supply-chain and purchasing managers. They act as barometers to the trading environment.
PMI releases tend to have a medium to low impact and most are supplied by Markit Economics.
Effect of PMI on retail forex trading
The PMI score may be above the 50 Mark or below it. When it’s more than 50, it tends to positively correlate the currency’s value, resulting in a bullish market. And the vice versa is true.
Examples of popular PMIs
1. Markit Economics PMI – United States
2. Commonwealth Bank Manufacturing PMI – Australia (Collaboration between the Central Bank and Markit economics)
3. Caixin China Manufacturing PMI™ – China (Released by Markit Economics)
6) Interest rate decisions
Interest rate decisions are the purview of central banks. The decisions have far-reaching effects on all aspects of the economy down to the prime rate charged by banks when lending to each other.
Okay, interest rate decisions are high impact, but does this mean that rates changed several times a year?
They may change or remain fairly consistent. For instance, analysts have predicted that the fed rates will remain at 0.25% until 2021.
Effect of interest rate decisions on currency trading
Any increase in the interest rate will have a positive correlation on the currency value. In contrast, a rate decrease decision may result in a bearish market with plenty of sellers.
Examples of popular interest rate decisions
1. Fed interest-rate decision – USA
2. ECB interest deposit rate decision – Eurozone
3. BoJ interest rate decision – Japan (JPY)
4. BoE Interest rate decision – United Kingdom
Press conferences by the central bank governors also carry heavy weight. Governors discuss matters to do with inflation, monetary policy, economic outlook, and more.
Publication of minutes of meetings held by committee members, policy summaries, and more releases tied to these events are also vital.
7) Additional key decisions
There are more significant releases you should consider, including:
· Housing prices
· Trade balances
· Building permits
· Exports and imports
· Budget balances
· Home loan
· Industrial/manufacturing outputs
· Labor costs
· Consumer confidence
· Note and bill auctions
Conclusion
The Global Economic Calendar is an essential tool for any forex trader engaged in fundamental or technical analysis.
Many beginners simply ignore the power that it offers. Failing to incorporate the economic data calendar in your trading means lacking an overall picture and trading solely on price action or historical data.
Note that Friday is NFP
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