The Impact of Prices in Forex Trading

No trader who considers themselves beyond the beginner level should have any doubts about the impact of prices in Forex Trading. In fact, price-related market movers represent some of the fundamental elements of fundamental analysis, a practice that is absolutely necessary to predict or at least get an idea of market trends. In the following article, we will provide some theoretical tools to fully understand the impact of prices on Forex Trading and offer some advice on how to best interpret the data, distinguishing between various market movers and giving due consideration to the specifics of the most important economies.

Why Price Market Movers Are Important

The first step in making profitable use of price market movers is to investigate the origins of their importance, that is, to answer the question of why price data is important. There are essentially three main reasons, and they concern technical, psychological, and distinctly monetary elements. The issue of the real economy. The truth, at least from this point of view, is quite obvious. Price market movers affect the real economy. This is not a trivial detail, since the performance, health, and outlook of the real economy strongly influence investors' actions at all levels (starting with institutional investors). Take inflation, for example: a slowdown in prices well below guard levels generates a paralyzing effect on the economy. Similarly, an out-of-control increase in prices generates severe imbalances. The issue of monetary policy. Here too, we are in the realm of apparently obvious truths. Price performance guides monetary policy decisions. That is, it is widely and primarily considered by central banks in modulating interest rates. In turn, interest rates have a clear and predominant impact on currency quotations (both for technical and psychological reasons). It is not surprising: the primary task of central banks is precisely to "keep prices in check," that is, to maintain them at a level that stimulates economic growth and does not harm short- and long-term investments. Psychology and technical effect. When it comes to impact on Forex Trading, it is difficult to draw a line between technical and psychological effects. This applies to all market movers, but especially those that have a direct or almost direct relationship with monetary issues. Price market movers, given their impact on monetary policy decisions, can be ascribed to this category. In any case, it is important to consider that the impact of price market movers could also be caused by the expectations that traders had before the publication and the expectations they form after the data is published.

What Are the Main Price Market Movers

The most important market mover, and the one most taken into consideration, is inflation. However, price analysis is not limited to the study of this data. Other factors complicate matters. Here is an exhaustive overview. Consumer Price Index. It is the most important price index, known in non-technical jargon as inflation. In English-speaking countries, it is known as CPI, Consumer Price Index. This market mover, for the few who do not know, indicates the variation in prices recorded during retail trade. It is derived from the study of a basket of goods, which is adjusted with wide margins of discretion by national statistical and research institutes (in Italy it is ISTAT). Universally, an inflation approaching 2% per year is considered good. Producer Price Index. This market mover is almost entirely similar to inflation. The Producer Price Index also indicates the variation in prices based on a basket of goods. However, prices are not measured at consumption, i.e., at retail, but rather at the passage of goods from production to distribution. It is a useful figure as it provides information on future inflation. Also in this case, the ideal level is close to 2%, although it tends to be higher than "simple" inflation. Minor variants of price indices. The Consumer Price Index and the Producer Price Index are the most important market movers (among those concerning prices), the ones that all countries develop and communicate. Depending on the needs of the various countries, which have significant discretion in this regard, other indices or more or less important variants may be communicated. The reference, for example, is to the Wholesale Price Index, which measures prices not at the transition between producer and distribution, but between distribution and retailer. More often, however, data is evaluated that portrays inflation net of certain "particular" goods, such as energy (e.g., oil).

How to Read Price Market Movers

How are price market movers read and interpreted? The answer is less obvious than one might imagine. Below is some useful information for those who want to use this type of market mover in a timely and effective manner from a forecasting perspective. Direction with respect to the target. To analyze many market movers, reference is often made to direction. If the value increases, the impact is bullish. If the value decreases, the impact is bearish (or vice versa). This reasoning, in relation to inflation and the like, is not valid. In fact, it is necessary to look at the movement with respect to the target. That is, answer the question: is inflation moving towards or away from the target? In the first case, the impact is bullish. In the second case, the impact is bearish. Diachronic analysis. In some cases, the impact is not consequential. That is, it could be "tainted" by some dynamics. For example, an objective difficulty that prices have experienced in taking the right direction. For this reason, it is always good to contextualize. For example, Japanese inflation is historically low. Moreover, it struggles even just to increase, to produce more signs. From this point of view, it is obvious: if Japanese inflation at some point clearly embarked on a direction of approaching the 2% annual target, the impact would go beyond what one would expect. The specificity of individual economies. This point is a direct corollary of the previous one. It is necessary to consider the data (and filter it) based on the specifics of the individual economy. For example, Europe and Japan are characterized by very low inflation. Conversely, inflation in Brazil and India is historically high (and this is not surprising, given that they are emerging economies). For this reason, a thirty basis point increase in inflation has one impact if it concerns Europe or Japan, and another impact if it concerns Brazil and India. This is the case even if in both cases there is an approach to the 2% annual target.