Forex markets are a global marketplace. There are buyers and sellers of different currencies located all around the world. All those participating in the forex markets help make it the largest market in the world, with trillions of dollars’ worth of trades going through each day. Given that forex trading is such a global activity, it means that global economic events are more important than ever and can impact heavily on a currency trade.
Macroeconomic factors are the principal driving force of forex markets. These factors influence a currency trader’s decision and therefore determine the impact and value of a currency. The health of a particular country’s economy is also a very important factor for the value of that country’s currency. The economic health of a particular country is usually assessed by various economic data releases across the month or quarter.
Economic releases are the backbone to forex trading. It is essential to use an up to date economic calendar to stay on the ball in this fast-moving market place. Perhaps the most obvious report to keep an eye on would be the Gross Domestic Product (GDP). This measures the economic growth of a country and is the baseline of its economic strength and performance. It is the total output of goods and services produced within an economy. The US and China are considered the countries with the highest GDP. China often reports GDP between 6%-7%, whilst the US often reports a GDP between 2%-3% on a yearly basis.
Another very important indicator, arguably more important at times than the GDP, is inflation. Inflation signals the rate of price increases over the period and therefore signals declining purchasing power. Yet whilst inflation is often seen as a negative for the consumer, reducing their ability to spend, it can also cause a currency to increase. This is because when inflation is high or increasing, central banks are more likely to raise interest rates in order to bring inflation lower. Higher interest rates make a currency more attractive to foreign investors, who then buy into the currency causing it to increase in value.
These are just two of the main economic indicators to watch out for each month. However, there are many others which are considered to be high impacting data releases as well. These include retail sales, employment levels, manufacturing indices are a few more which can also influence the movement of a currency. Generally speaking, if the release prints higher than the expected value for the indicator, the price of the currency increases.
In order to know when economic data will be released, use a good economic calendar. A good economic calendar will tell you nor only when information is being released, but also its level of importance. This is especially important when you are just starting out and aren’t yet quite sure of which economic readings are likely to hit the currency when released,