Trading on News and Economic Releases
Here is the list of the some of the best news events to trade with Forex:
- Consumer Price Index (CPI)
- Manufacturing Purchasing Managers Index (PMI)
- Gross Domestic Product (GDP)
- Consumer Confidence Index (CCI)
Let us discuss each of those in detail, exploring how those can be interpreted as ‘bullish’ or ‘bearish’ signs.
Consumer Price Index (CPI)
CPI measures the rate of the annual increase in the basket of goods and services in a given economy. It is published on a monthly basis. Considering that most of the Central banks around the world are actively targeting the inflation level, this type of announcement can have major implications on the Forex Market.
For example, the Bank of England aims at a 2% inflation rate. In fact, if this measure deviates from its target by more than 1%, then the Governor of this institution has to write an official letter to the UK Chancellor of the Exchequer. This document must explain the reasons for this variation and discuss the plans for reading this situation.
Therefore if the UK CPI falls well below 2%, this might indicate that the Bank of England will be more inclined to cut rates and consequently weaken the exchange rates of GBP.
This is the major indicator of the health of the Real Estate market, published every month. The steady high rate increases in home sales can be a positive sign for the performance of the housing sector in a given country. This can also support the exchange rate of the national currency.
Manufacturing Purchasing Managers Index (PMI)
The Institute of Supply Management (ISM) publishes PMI on a monthly basis. This measure surveys top-level executives in more than 400 companies and mostly focuses on the economic trends in the manufacturing sector.
The index is measured by the number from 0 to 100, with 50 being the level of the previous month. So if the PMI is above 50 then this will represent an expansion and anything below 50 will be a sign of contraction.
Expanding the manufacturing sector can help currencies to appreciate, especially when it comes to export-oriented economies, like Germany, South Korea, China, and Japan.
Gross Domestic Product (GDP)
This measures the annual growth rate of the Gross Domestic Product and is expressed as a percentage. It is published on a quarterly basis. By many traders and investors, for developed countries 3% or higher growth rate is considered a solid indicator.
If the country’s GDP growth number turns negative for two or more consecutive quarters, then the economy is considered in a recession. This can put the currency in question under significant selling pressure.
Another major monthly economic indicator, which shows the percentage of unemployed people from the labor force, looking for work. Most central banks do not target this indicator. One exception to this is the Federal Reserve, which is aiming at 5% or lower level.
Therefore, it is worth keeping in mind that USD might be more receptive to changes in the unemployment rate, then EUR, JPY, and other currencies.
Consumer Confidence Index (CCI)
Published monthly by the Conference Board, the Consumer Confidence Index is constructed using the date from surveying 5,000 US households regarding their opinions on business, unemployment and personal financial conditions.
It is widely believed that if the consumers are more confident about the economy, they will be likely to spend more money on goods and services. This can also help the currency to appreciate.
Non-Farm Payrolls (NFP)
This measures the total number of paid employees in most sectors of the economy in a given month. As the name suggests, this measure excludes workers from agriculture. Also, NFP does not include government and non-profit organizations employees.
Rising payrolls are usually a good sign for the economy and can support USD against its peers.
Crude Oil Inventories
Published by the US Energy Information Administrations, the Crude Oil Inventories provide information on US Oil stocks. This measure is updated every single week. The price of every single good is determined by the supply and demand. Therefore, Crude Oil Inventories provide us with the latest picture in the first category.
Without any major changes from the demand side of the equation, the expanding supply can put pressure on Oil prices and also on currencies like CAD and RUB.
Initial Jobless Claims
Weekly reports of this measure are published by the US Department of Labor. This shows the number of people claiming the unemployment benefits for the first time. Expanding the number of jobless claims is generally considered as a poor sign for the economy and consequently can put selling pressure on a given currency.
This is yet another monthly measure of Consumer Confidence, however unlike in the previous case, it is not based on household opinions, but their behavior. Rising retail sales is considered as one of the signs of a healthy economy and can support the exchange rate of the currency.
Interest Rate Decision
Most Central Banks schedule 8 monetary policy meetings per year. Not only their decisions but also statements at the press conference can have a major impact on Forex Market.
Rising interest rates give investors an opportunity to earn higher returns on their deposits, CDs, and other fixed-income investments. This makes the local currency more attractive to market participants.
This measures the balance between the total number of exports and imports the country has with the rest of the world. This is also one of the four main components of the GDP.
The positive trade balance helps the currency in two ways: Firstly, as part of the Gross Domestic Product, it can increase the rate of economic growth.
At the same time, it is worthwhile to keep in mind that for foreigners to purchase goods and services from any given country, they have to convert their money to local currency. This creates a natural demand for the latter, which can improve the exchange rates.
This shows the difference between government revenues and expenses. The majority of countries operate with deficit spending. There are some exceptions to this: some developed countries, like the US, UK, and Germany having positive budget balances for some periods. Norway can be considered a rare exception, as it is running a massive budget surplus for many years now.
For example, the EU guideline urges the member states of the Eurozone to keep the budget deficit lower than 3% of GDP. As the last European Sovereign Debt Crisis has shown, if the deficit spending gets out of control, this can eventually threaten the solvency of the country and can easily lead to significant monetary devaluations.
On the other hand, looking at past history of exchange rates, a budget surplus can certainly help the currency to appreciate. One of the best years of USD’s performance, was the period between 1998-2001 when the revenues of the Federal government was actually higher than its expenses.