How to Read Forex Economic Calendar
Every live Forex economic calendar lists all of the upcoming economic data releases and fills it with actual numbers as these announcements start to come up.
However, it is worthwhile to keep in mind that not all data releases have the same impact on the market. Many Forex news websites do categorize and mark them as either low, medium or high.
- Low volatility marks the announcements with little expected market reaction, this might include some minor bond sales, results of some surveys and other not well-known indicators.
- Medium volatility denotes more important news releases with a moderate impact on Forex. Retail sales, trade balance, other household spending data often end up in this category.
- High volatility includes the most important events, such as interest rate decisions, Consumer Prices Index, Gross Domestic Product, Unemployment Rate and Non-Farm Payroll numbers.
Daily Forex economic calendar
Obviously, there is no such thing as the single best economic calendar for all traders. Everyone might have his or her own preference. Some people might prefer some particular design of the calendar, while others might like to use one which comes with their trading platform.
Just to take one example, there is the Axiory economic calendar for Forex trading
, which lists all important economic news announcements. Its trading platform Metatrader 4
has both apps and computer software for download, all of which have an economic calendar for traders attached.
What are some of the most important items on the economic calendar?
So to which announcements should traders pay the most attention? The most obvious one is the central bank interest rate decisions. In general, everything else being equal, higher-yielding currency attracts more traders and investors, while the lower-yielding ones are mostly used for carry trade and borrowing. Very often the statements made at the press conference by the chairmen and other board members can be equally important as the actual rate decision.
The latest Consumer Price Index announcements can be the second most important items on the list. Most central banks in the world are actively targeting some level of inflation. Therefore the latest figures can give traders and investors an opportunity to analyze how close CPI is this goal and how authorities would respond to divergence. Inflation is also an essential component for any long term Forex analysis, such as determining Purchasing Power Parity levels.
Next to the list comes the unemployment rate. Most of the central banks, the Federal Reserve being the exception here, do not have an official target for this. However, they usually do respond to the significant changes in jobless rates.
It goes without saying that Gross Domestic Product indicators, especially the growth rate of real GDP is another important factor in moving the exchange rates. Currencies are supported with strong economic indicators, with traders realizing that in this case, central banks are more likely to increase the interest rate.
On the other hand in case of weak growth or even recession, the Federal Reserve, for example, is more likely to reduce rates significantly and expand the Quantitative Easing program, quite often leading to dollar weakness in the process.
Other important new announcements include Non-Farm Payrolls, Consumer Confidence Index, Trade and Budget Balances, Retail sales, Home sales, and Manufacturing Purchasing Managers Index.
How to trade Forex using economic calendar
At first glance it might seem a good idea to trade during major announcements, after all, high volatility does create opportunities for significant payouts. Actually, many professional Forex traders usually try to close their positions before the major announcement and only resume their trading as the economic data is released and market reaction becomes clearer.
The reason behind this is that because many traders close their position before those announcements, the liquidity in the market is lower. This increases the risk for traders significantly. Surely traders can get lucky sometimes, but before the news release, it is mostly still a 50/50 guessing game. Even if the forecasts ended up being accurate, it is still difficult to guess what will be the exact reaction of the market.
The problem here is that the traders might already be expecting the actual outcome of the news release and priced it into the currency pairs. So by the time the central bank rate decision or latest CPI or GDP numbers come out, the market might have a quite different reaction, than one could logically expect. This is why the saying: ‘Buy the rumor, sell the fact’ is so relevant for the Forex trading.
To illustrate this, let us look at some of the real-life examples of this and how the market responded to those types of announcements.
Due to COVID-19 concerns, the US Federal Reserve has decided to cut the Federal Funds rate by 25 basis points on March 3rd, 2020. As we can see from the chart above, the initial reactions from traders and investors across the globe was quite predictable. The day before this announcement, USD/JPY was trading above ¥108 level. After this decision, the US dollar started to fall, within 4 days eventually declining to ¥102.
After this development, USD/JPY started to recover, eventually returning to ¥108 level by March 13th. However, 3 days later the US Federal Reserve made an emergency announcement, further cutting Funds rate by 150 basis points, reducing it back to 0 to 0.25% range.
Now, according to the conventional wisdom, the pairs should have fallen even much harder, than in the previous case, since the 1.50% cut is more significant than 0.25%. At first sure enough, the Japanese Yen appreciated and the USD has fallen to near ¥106.
However, after this initial decline, the USD/JPY has risen steadily for the next 4 trading days, eventually ending the week well above ¥110, a higher level, compared to the day before the Federal Reserve started cutting rates.
So how can we explain this? Why has USD/JPY not responded to the second and larger rate reduction? Well, one of the reasons for the steep decline to ¥102 after the first announcement, might be the fact that the market judged that the Federal Reserve would not settle for just a one-off 25 basis point rate cut.
With the spread of the COVID-19 virus many businesses like airlines and hotels suffered serious losses, some of them could potentially end bankrupt. In several countries restaurants, bars, museums, and cinemas have been closed down. Many other firms have temporarily suspended their operations. As a result, many people lost their jobs.
Clearly any honest analysis can conclude that this could most likely lead to a significant decline in the economic activity. Considering that the household consumption and business investment are two essential components of gross domestic product, this can have a major impact on future economic growth. Therefore traders and investors across the world expected more decisive action from the US central bank.
Therefore, by the time of this massive 150 basis point rate cut, this step was mostly priced in and expected, therefore USD/JPY has soon recovered from a short-lived decline.
Therefore, when it comes to announcements with the highest expected volatility, one way to deal with this is to close all positions before this event risk, observe the relevant Forex pairs for some time and resume training afterward.
Another option is to guess the possible outcome and place positions accordingly. Returning to our earlier example about the Reserve Bank of Australia, if it decides to go for a rate cut to 0%, then this is going to disappoint the market expectations. So if a trader expects this outcome, then it is possible to open short AUD/USD, long EUR/AUD and similar positions.
However here stop-loss orders are essential to cut losses in case the market goes in the opposite direction. As we have seen from the above example, guessing the currency movements after major announcements can be notoriously difficult. Therefore, stop-loss orders can act as a valuable insurance policy in those cases.