The previous articles showed the most important economic news to consider when trading the Forex market, but the amount of news to consider is endless. Every day something is happening around the world that influences the Forex market. From an economic point of view, there is other news to watch besides central banks’ interest rate decisions, inflation and Purchasing Managers’ Indexes (PMIs). These news items are still marked in red, though, and the market reacts differently when they are released.
Defining an Economy
Traders should keep in mind that a currency pair moves based on the economic differences between the two currencies it comprises. These economic differences are highlighted by the news released from various sectors: housing, construction, etc. The sum of all of them gives an economic diagnosis, and a central bank makes its decision to tighten or loosen its monetary policy accordingly. Based on this, economies are compared with one another, and traders decide to buy or sell their currencies.
Housing Data
The housing sector is a vital one for every economy. Its importance is evidenced by the fact that it influences 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 in the housing sector. This tells us much about its importance, and why housing data is closely watched all over the world.
The US looks 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, medium-to-long term implications 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 US are Building Permits, Existing Home Sales, and Pending Home Sales. In other economies, the whole construction sector is interpreted and analysed 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 worth, and is a good measure for comparing 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 figure is, the better for that economy, as it means 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 that the central bank will face up to the 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. With this indicator, the market moves aggressively if the outcome is different from the forecasted value. The other releases, the Second and the Final ones, are viewed as secondary data in the sense that the market does not react. The reason for this is the fact that only rarely are the second and the final GDP estimates different from the first one, 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 advance figure is far more important than the final one.
Consumer-Related Data
At the centre 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, and hence the health of an economy. The gauge for 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 figure the better for the economy and the currency. The health of the consumer plays a key role in any economic cycle. Consider the following economic logic to fully understand why the 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 use 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 signal 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 the next time. This is the whole reason why Forex traders look at the economic calendar, as it helps them to get an idea of what the central bank is going to do: ease the monetary policy or not. As a result, when the data differs from the forecasted value, it means that the central bank is called to action. Globalisation these days has made central banks all act in the same manner, but results are not the same in different central banks’ jurisdictions. Just to give you an example, the Bank of Japan has been fighting deflation for the last two decades with little or no results, and in doing so it has deployed unprecedented monetary policy tools. Some of those tools have been used in other parts of the world with quite some success, and this only goes to show that monetary policy is not the only thing that can influence an economy. All the other economic releases except the ones listed in this article, and in 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 value is quite different from the forecasted one.
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.