Forex trading is rapidly becoming more popular among retail investors and traders these days. Today we have many trading platforms available with cutting-edge technology providing access to major economic data along with historical price movements. However, fair understanding of this economic data becomes crucial to convert any economic event into tradable opportunity. We have already discussed about right way to trade forex or currencies in India and learnt the basics of currency derivatives market in our last article of this educational series. Now, let’s go a step further and find out what are the major fundamental factors that move the currency markets? and How to get benefited by capturing these price movements?
Monetary policy events
This is one of the most important events to decide the future direction of a currency. Central bank of a country has power to take monetary policy related decision, to maintain right balance between inflation and growth of that particular country. This adjustment in monetary policy can be done by changing the interest rate.
Generally during this central bank events currency market of that particular country remain highly volatile and any unexpected action from central bank can result in wild movement seen in currency value of that particular country. Before these events big investors and traders try to make hefty positions based on their expected central bank action. However, small investors generally prefer to remain out of the market or trade on cautious note to avoid taking a risk in case central bank’s action doesn’t go as they expected. Many a time even though monetary policy is kept unchanged by the central bank, traders look for a clue for possible change in monetary policy in near future. In India Reserve Bank of India review monetary policy on bi-monthly basis.
Inflation data is one of the major parameters a central bank takes into account ahead of making any change in monetary policy. While very high inflation can be alarming for an economy, on the other hand too low inflation or deflation can hamper the growth of the economy, especially in case of emerging markets like India. Therefore, central bank always tries to keep a healthy balance between inflation and growth data. Expectations and significant change in actual data from expectation also provide volatility to currency of that particular country. In India inflation data is released on monthly basis.
Gross domestic product (GDP)
GDP data is the ultimate indicator of a country’s economic health. It measures national income and output of a given country’s economy; hence on the day of release of GDP data from major economies of the world can impact global financial markets including currencies. This data is generally released on quarterly and annual basis and covers output from all three sectors agriculture, industrial and service sector.
Manufacturing output or industrial production data is also a crucial data to be tracked by currency traders to have a fair idea of country’s industrial sector at large. Especially in the emerging economies like India industrial production or manufacturing data has major significance and is released on monthly basis in India.
Various employments related data are released from the US in the first week. And US being the largest economy in the world, their jobs data play a crucial role in deciding trend for major currencies for short term. More than expected US unemployment figures reported by Bureau of Labor Statistics in the US can keep US dollar on subdued note and vice versa.
Consumer confidence data
Positive consumer sentiments are vital for the growth of an economy that leads to more domestic demand for goods and services. Strong consumer confidence data of a particular country shall provide firmness to their currency against others. While consistently weak consumer sentiments can be seen as an early indication of potential risk for country’s future growth.
Other political economic events
Apart from analysing major fundamentals, it’s important for a currency trader to stay up to date on major economic and political news from around the world. Especially any news signalling towards possible political or economic instability from large economics of the world which can have global impact. Major political events like national level electoral process and results are to be tracked closely to analyze their impact on relevant currency and economy at large.
No doubt having a strong currency reflects optimism for that particular country however it’s not always in favour to have an overvalued currency against its peers. Especially for export oriented nations as it may hamper their export broadly and will be a disadvantage for their export businesses competitiveness. Therefore analyzing a currency based on fundamental is not a task with certain impact; instead this outcome or impact of fundamental events could vary based on contemporary scenario.
As indicated earlier in addition to discussed fundamental factors, a trader can also form a view based on technical analysis. We shall discuss application of technical analysis on currencies market in detail in the next article of this series, as we want you to remain a step ahead from the crowd while trading currencies.
To be continued…