Other Economic Releases to Watch
The previous articles showed the most important economic news to consider when trading the Forex market, but the news to consider is endless. Every day something is happening around the world and the Forex market is influenced. From an economic point of view, there is other news to watch besides central banks interest rate decision, inflation and PMI’s (Purchasing Managers Index). This news is still marked with the red color and market reacts differently when they are released.
Defining an Economy
Traders should keep in mind that a currency pair is moving based on the economic differences between the two currencies it represents. These economic differences are highlighted by the news released for various sectors: housing, construction, etc. The sum of them all shows an economic diagnosis and a central bank is making its decision to tighten or loosen the monetary policy accordingly. Based on this, economies are compared with one another and traders decide to buy or sell their currencies.
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The housing sector is a vital one for every economy. Its importance is being given by the fact that it is influencing other horizontal industries and the rise or fall of the housing sector is a driving engine for the overall economy. Keep in mind that the 2008 financial crisis started from the housing sectors. This tells much about its importance and why the housing data is closing watched all over the world. The U.S. is looking at the housing data from various points of view. It all starts with the Building Permits indicator. While many traders ignore it, this indicator shows the expansion or contraction of the housing sector. If the Building Permits indicator shows a sudden rise, implications for the medium to long term for the overall construction sector are significant. It means that new projects are developing, projects that already have been approved, and horizontal industries will gain from them. People will get hired to build them, construction companies will have new contracts, the furniture industry will be positively affected, etc. The housing indicators to watch in the U.S. are: Building Permits, Existing Home Sales and Pending Home Sales. In other economies, the whole construction sector is being interpreted and analyzed based on a PMI release dedicated to it.
Gross Domestic Product (GDP)
The GDP indicator shows the total value of goods and services that make up an economy. It represents what an economy is worthen, and it is a good measure to compare economies percentage wise. When the GDP moves into the positive territory, it means the economy is expanding, while a negative print shows an economy that is contracting. By default, the bigger the GDP number is, the better for that economy and the currency is going to be bought. The opposite is true as well, in the sense that a GDP that is shrinking shows an economy that is suffering. The result is that the currency will be sold as expectations grow for the central bank to face this situation and ease the monetary policy. Not all GDP releases have the same relevance for the Forex market, though. For example, in the United Kingdom, there are several GDP releases, but the most important one is the first release, the Preliminary GDP. This is when the market is moving aggressively if the outcome is different from the forecasted value. The other releases, the Secondary and the Final one, are being viewed as secondary data in the sense that market is not reacting. The reason for this is the fact that rarely the second and the final GDP is different than the first estimate, and market participants know this. The same is valid in the United States of America, with the first release being called the Advance GDP, and the last one the Final GDP. The advanced figure is far more important than the final one.
Consumer Related Data
At the center of every economic boom or downturn is the consumer. This makes consumer data a closely watched event as it shows the health of the consumer, hence the health of an economy. The gauge for the consumer data is the Retail Sales indicator. This indicator is released all over the world for every economy, and it has the same implications: the bigger the number the better for the economy and the currency. The health of the consumer is playing a key role in any economic cycle. Imagine the following economic logic to fully understand why consumer plays a central role! If consumers are not buying goods, this results in retailers having growing inventories. If inventories are rising on the retailer’s side, factory orders will decrease. This, in turn, will lead to factories laying off people due to downsizing. These people will, in turn, apply for unemployment benefits, so the cat is back in the hands of the government. And it all started with the fact that consumers are not buying enough goods! To stimulate consumers to buy, central banks are using monetary tools to give an incentive for commercial banks to lend more money and to make lending attractive in general. This is particularly important these days when economic growth is small and inflation is in negative territory. The Retail Sales indicator is released monthly and central bankers, as well as traders, are keen to know the changes in it. It is an early sign of economic expansion or contraction cycles. What matters the most for Forex traders is what the central bankers are going to do when they meet next time. This is the whole reason why Forex traders are looking at the economic calendar, as it helps to get an idea of what the central bank is going to do: ease the monetary policy or not. Therefore, when the data differs from the forecasted value, it means that the central bank is called to action. Globalization these days made central banks acting in the same manner, but results are not the same in different central banks jurisdictions. Just to give you an example, Bank of Japan is fighting deflation for the last two decades with little or no results, and in doing that it deployed unprecedented monetary policy tools. Some of those tools were used in other parts of the world with quite some success, and this only shows that monetary policy is not the only thing that can influence an economy. All other economic releases except the ones listed in this article and other articles written in the Forex Trading Academy project are second tier data. The market will react to those releases, but only if the actual is quite different from the forecasted value.
Other educational materials
- The Importance of Press Conferences
- Forex Trading When Central Bankers Hold Speeches
- Risk-off vs. Risk-on Trading
- Macroeconomics in Forex Trading
- Geopolitical Risks That Influence Markets
- Different Trading Styles
Recommended further readings
- “Analysis of the intraday effects of economic releases on the currency market.” Sun, Edward W., Omid Rezania, Svetlozar T. Rachev, and Frank J. Fabozzi. Journal of International Money and Finance 30, no. 4 (2011): 692-707.
- “Option volume and volatility response to scheduled economic news releases.” Nofsinger, John R., and Brian Prucyk. Journal of Futures Markets 23, no. 4 (2003): 315-345.