What drives the FX market. How to trade data.

/The article is intended for novice traders. More training materials can be found here: https://www.varchev.com/trading-uni.htm. /

Every Monday through Friday, thousands of traders from every corner of the world trade forex, producing a daily trading volume of over $6 trillion. Compared to other financial markets, the forex market has the greatest depth and has experienced the most significant market growth, adding over 40% to its daily trading volume over the past decade.

Macroeconomic indicators and events play an important role, unlike in the past where they were not as strong a factor.

Unemployment rates

Countries calculate unemployment rates by measuring the number of people willing and looking for work versus those active in the nation’s labor force. Important exceptions to this category include people with disabilities, pensioners or students.

Market volatility can stem from unemployment rates, as this is a lagging indicator and reflects changes that have already occurred in a country’s economic condition.

Three ways to trade this data.

• Lower than forecast – A decrease in the unemployment rate in a nation is a positive force and indicates that the nation’s economy is strengthening, creating an opportunity for purchases of the local currency.
  
• Higher Than Forecast – When a nation faces rising unemployment rates, currency traders tend to look for opportunities to sell the local currency.
  
• Lower than the natural rate of employment – Unemployment is not sustainable for long as it leads to rising inflation. If unemployment falls too much, it could fuel inflation and the Central Bank would have to raise interest rates, as it did last year. This is positive for the local currency and could lead to a strong upward trend.

When using unemployment data for currency trading, it is most effective when compared on an annual basis.

Economic Growth and Production

Gross domestic product (GDP), which is measured on a monthly, quarterly, or annual basis, measures the output and production of manufactured goods related to a nation’s economy. In short, it conveys to economists and marketers the overall health and growth potential of a country’s economy.

Three ways to trade GDP:

1. A sell-off of the local currency against other currencies is likely to occur if GDP is lower than expected.
2. Possibility for the local currency to appreciate against other currencies is likely to occur if GDP is higher than expected.
3. If a nation’s gross domestic product is within its forecast, traders may need to compare the previous quarters and year to better understand the economic health of the underlying currency. – often leads to a lack of immediate reaction and it is better to wait for clearer signs of movement.

Interest rates

Interest rates are the single most significant factor affecting the foreign exchange market and are managed by each of the eight global central banks. The eight major central banks include:

• US Federal Reserve Bank (USD)
• European Central Bank (EUR)
• Reserve Bank of Australia (AUD)
• Reserve Bank of New Zealand (NZD)
• Swiss National Bank (CHF)
• Bank of Canada (CAD)
• Bank of England (GBP)

To fight inflation, central banks raise interest rates. On the other hand, when the central bank cuts interest rates, they encourage lending and flood the economy with money. Traders who understand economic indicators such as the consumer price index (CPI), employment levels, the housing market, the mortgage market and consumer spending tend to better judge how central banks will react.

More often, forex traders structure trading approaches when central banks make significant announcements regarding changes in monetary policy.

Sometimes there are surprising changes in interest rates. When surprise changes occur, forex traders must act quickly to take advantage of market sentiment before the trend resumes. If a central bank raises interest rates, it creates an opportunity for purchases and appreciation of that nation’s currency. If the central bank lowers interest rates, traders tend to sell and buy currencies with higher interest rates.

Inflation rates

Fluctuations in inflation cause changes in the currency exchange rate. Countries with higher inflation experience currency depreciation, which causes interest rates to rise to stimulate economic growth. When countries have a lower inflation rate, that nation’s currency tends to appreciate, creating a potential buying opportunity.

All influencing factors

Short-term factors

• Interest rates
• Commodity prices
• Consumer confidence

Medium-term factors

• Bond Yield
• Economic Growth
• Political Outlook
• Trade deficits
• Unemployment rates
• Fiscal and monetary policy

Long-term factors

• Purchasing Power
• Trade Balance
• Gross Domestic Product

Military actions and environmental disasters have long-term effects that immediately affect a nation’s currency, introducing increased volatility and uncertainty into its market.

/The article is intended for novice traders. More training materials can be found here: https://www.varchev.com/trading-uni.htm. /