This article covers the effect of economic data and forex news on a trader’s actions.
Economic theories have a long-term effect on currencies, but in the shorter term economic data impacts more on currencies. In the same fashion as financial news can hugely impact the stock price of a large company, information and news about a country could have a massive impact on its currency. News regarding changes in inflation, consumer confidence, political instability, interest rates, unemployment and the gross domestic product, among other factors, can lead to huge gains or losses, depending on the nature of the news and the current state that the country finds itself in.
The sheer amount of forex news from around the globe can become frustrating and intimidating. However, as you become more relaxed in the forex trading world, you will soon know which bits of forex news will impact your currency pair the most. Some of the economic factors that have the most impact irrespective of the country where the announcement originated should be watched with care.
Interest rates play a massive role in the foreign exchange market. The most focus as regards interest rates is when the central bank announces changes to its bank rate. This is used to make adjustments to the supply of money and to institute the monetary policy of the country.
Gross Domestic Product
The GDP of a country is a measurement of all the services and finished goods that was generated within a country during a specified period of time. This calculation is divided into four categories: governments spending, total net exports, private consumption and business spending. The GDP of a country is considered to be the most effective overall measure of a country’s economic health. An increase in this measurement indicates positive economic growth.
Data related to inflation indicates the decreases and increases of the levels of prices for a specific period of time. A basket of goods is normally used to measure these changes from one period to the next. An increase in prices will be an indication of inflation and is suggestive of a decline in the currency rate.
Geopolitical and Macroeconomic Events
The largest fluctuations in foreign exchange often stem from geopolitical and macroeconomic events such as monetary policy changes, wars, financial crises and elections. These events are able to reshape or change a country.
Employment Data and Forex News
Countries normally release this type of information which includes data about the number of people currently employed within its economy. In most cases, when there is a positive increase in the employment level, it indicates that the country is enjoying a prosperous economy. A marked decrease in employment levels indicates that the economy of the country is shrinking. Countries that may have experienced recent economic downturns that now show an improvement in its employment data could experience an increase in the value of its currency as the data is an indicator of an economic recovery. The other side is that high levels of employment may lead to inflation, so it is possible that this type of data could cause the currency value to decline. The economic data and its effect of the movement of a currency will be dependent on the current circumstances within that country at the time of the release of the data.