Forex Trading: 3 Key Events to Mark on Your Calendar
March 22, 2017
Forex trading practitioners at certain levels know the importance of fundamental analysis. It allows predicting price trends by studying extra-market events capable of affecting assets, in this case currency pairs.
However, to perform a good fundamental analysis, it is necessary to keep in mind which events can influence prices, and therefore also the relative time coordinates. Your calendar must always be up to date. The events, which in jargon are called market movers, are numerous and depend on the currencies under consideration. Three categories of events, however, should never be missing from any agenda.
The importance of central banks
Central banks play a leading role in the real economy but also in finance, and therefore in the foreign exchange market. This should not be surprising: the FED, the ECB and other similar institutions decide monetary policy, which directly influences the value of currencies.
The lever that central banks use most frequently, and which has the greatest impact on Forex trading, is the cost of money, which is manipulated through the increase, decrease or maintenance of interest rates. If rates rise, the amount of currency in circulation decreases; if rates fall, the same amount decreases. The purpose of manipulating rates is to control prices or, in more extreme cases, to intervene in economic growth.
Among the side effects is precisely the influence on the value of currencies. A restrictive monetary policy, which consists of a rate hike, appreciates the currency. An expansionary monetary policy, which includes not only lowering rates but also purchasing public and private securities, depreciates the currency.
Monetary policy decisions take place during meetings and are made public in subsequent press conferences. This is the event that should be marked on the calendar: the press conferences of central banks.
The role of the real economy
The real economy also has an impact on Forex trading and on currency pairs. In general, the principle is that, in a regime of variable exchange rates, the currency of a healthy country tends to appreciate and the currency of a country in recession tends to depreciate. This is true, of course, in the absence of additional factors.
A very important real economy figure is inflation, i.e. the consumer price index. In theory, high inflation corresponds to a currency value that is progressively decreasing, since the same amount of currency buys an ever-decreasing number of goods (reduction in purchasing power). This dynamic has effects in Forex trading when it generates devaluation. The link, it must be said, is not automatic.
Inflation is important, however, because it anticipates the moves of central banks, so in a sense it announces future monetary policies. High inflation precedes a restrictive policy, low inflation precedes an expansionary policy. Since, as can be seen from the previous paragraph, monetary policies affect currency pairs, inflation becomes a parameter that must absolutely be taken into consideration.
The event to mark on the calendar, therefore, is the announcement of inflation data, both estimated and final.
Finally, a certain importance is held by the data that more than any other represent the thermometer of an economy: GDP, unemployment rate and retail sales. As mentioned earlier, a healthy economy often sees its currency strengthen. The conferences announcing these data are generally separate, but the dates are made known well in advance. These should also be marked on the calendar.
