Forex Trading: What Events Affect the Markets?
When it comes to trading the Foreign Exchange (Forex) market, it is very important to understand which events will affect the market. Traders often choose to trade around the economic calendar’s volatility because it has a large amount of influence in the market. Furthermore, it can be difficult to sift through all upcoming economic events in order to know which ones will be the most influential. This article will outline the specific governmental and nongovernmental events that affect the market and influence the way trades to occur.
What are the most important economic events?
Central Bank Rate Decisions
The Central Banks of the world meet every month. There they discuss interest rates which cause some of the Forex markets highest volatility. The central bank can increase or decrease the discount rate of currencies which can have drastic macroeconomic effects. Traders should keep a close watch on central bank decisions in order to maximize their opportunity since there is a ton of activity surrounding these decisions.
The U.S. Department of Labor produces the Non-farm Payroll Employment Report. This report tracks the availability of jobs in the economy by reporting if it has increased or decreased since the prior month. This report is one of the most common reports Forex traders watch as it allows them to judge the health of the economy and decide where the markets may be heading. Specifically, loss in the job market will likely decrease demand while an increase in the job market will likely increase demand.
The unemployment rate is defined as the percentage of the labor force that is actively in search of work. It is closely related to the Non-Farm Payroll that is released every month as it too is a key indicator of the health of a country’s economy. During a period where a country’s labor market is weak, that country’s currency could easily begin to fall in the Forex market.
GDP: Gross Domestic Product
Gross Domestic Product (GDP), is leaned on as the largest measure of overall economic health. Though it takes a while to collect the necessary data to calculate a country’s GDP it is still very important to keep one’s eye out for economic releases pertaining to it. It is very important to watch GDP so as to confirm if the state of the country’s economy is moving as expected. The state of a country’s GDP growth will allow people to evaluate the worth of investments and see if the market is moving in the direction as predicted.
FOMC: Federal Funds Rate
Eight times throughout the year, the Federal Open Markets Committee (FOMC) meets to determine US monetary policy. Although the USD is the only currency directly affected by this policy; the USD is one of the most important currencies in the Forex market, so changes to the US currency is very important. If the Fed makes changes to the federal funds rate, and the outcome of the meeting is different from the current course, it will create volatility in the market.
Effect of War on Currencies
War of any kind can be devastating to a country’s economy. Much like a natural disaster, the impact of war is brutal and widespread. Similar to disasters, the damage to a country’s infrastructure in a hot war can deal a huge blow to a nation’s short-term economic viability which in turn costs citizens and governments billions of dollars. Furthermore, war is very uncertain so it’s not surprising that there is a lot of market uncertainty as well. Countries at war experience a higher level of currency volatility compared to those not engaged in conflict.
Impact of Natural Disasters on Currency Prices
It is almost certain that a natural disaster will negatively affect a country’s currency. Also, earthquakes, floods, tornadoes, and hurricanes harm a country’s citizens, morale and infrastructure. Once again infrastructure is a key thing to consider as it is the backbone of any economy. Any disruption to a country’s infrastructure can severely limit the economic output of a region. Due to further economic uncertainty after a natural disaster, there will likely be a decrease in consumer spending and possible loss of consumer confidence as well.
Understanding market volatility and how economic policy, natural disasters and war affect markets is crucial to success while trading. It is also important to note how important unemployment and GDP are in measuring the economic strength of a country. The economic strength of a nation has a huge effect on the strength of its currency; therefore, economic uncertainty will likely weaken a nation’s currency. All in all, if traders take the time to educate themselves in these areas then they are practically guaranteed to have more successful trades.