There is no doubt that news plays a massive role in the day-to-day decisions you make as a forex trader. News trading has risen in popularity over the years, partly because it gives forex traders the chance to earn massive profits in a short period, if executed correctly. However, it’s important to remember that not all news events have the same level of impact as others in the forex market.
If you’re currently maintaining an economic calendar, you can determine which news could potentially lead to swings in the market and what news you don’t need to pay heed to. Which brings us to the question: what news events should you, as a forex trader, focus on?
Well, here’s what you need to look out for:
Overnight Interest Rate
The central banks of different countries sometimes lend and borrow money from each other, and these transactions take place overnight. The central banks try to control the overnight interest rate by loaning money in these markets at their overnight interest rates. Thus, overnight interest rates are an essential part of their monetary policy tools.
Overnight interest rates are the primary reason behind the fluctuation of prices in the market since they also affect the swap rate. As a matter of fact, many forex traders believe that goal of forex fundamental analysis (as opposed to technical analysis) is to forecast interest rates of these major central banks.
The majority of central banks across the globe aim to keep the unemployment rate low and steady. Any major monetary policy decision taken by the central bank is to maintain the unemployment rate close to a level known as NAIRU, which is essentially the level of unemployment where inflation in the country is constant.
Keeping this in mind, every major economy releases its set of unemployment numbers each month, and every time it goes down, the value of that country’s currency (in theory) goes up.
This improvement occurs due to the fact that, when the unemployment rate falls below the NAIRU level, the central banks of these economies tend raise the interest rates in order to bring inflation back under control.
Consumer Price Index (CPI)
The consumer price index (CPI) keeps track of the inflation rate of a country relative to a base year. The central bank of a country uses its monetary policy to keep inflation in check and within a specific range. When the rate of inflation crosses this range, the central bank can again use interest rates to control inflation.
Gross Domestic Product (GDP) Growth Rate
The Gross Domestic Product (GDP) essentially measures how well an economy is currently doing. In general, we can therefore say that the higher the GDP growth rate of an economy is, the more its currency can be expected to appreciate. Likewise, the higher a country’s GDP growth rate is relative to another country’s growth rate, the stronger its currency will be compared to the other country’s currency.
As you have now seen, there are multiple economic indicators that can be a part of fundamental analysis in the forex market. Although technical analysis probably plays a larger part, especially among individual traders like us, it is still important to have a basic understanding of the fundamentals that moves the forex market.
Are there any other fundamental indicators you think are important? Let us know in the comments below!