Jasmine Birtles
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Which Economic Reports Should Forex Traders Watch Closely?
Moneymagpie Team
20th Jun 2024
One of the biggest advantages of trading forex is that the market is open 24 hours a day, five days a week. Since market movements are influenced by news, economic data often drives short-term changes.
This is especially true in the forex market, which reacts not only to U.S. economic news but also to global developments. In this guide, you’ll explore which economic reports are important, when they are released, and how forex traders can use this information to make informed trades while trading currency pairs.
- Which Currencies Should You Focus On?
- Key Economic Reports to Watch
- How News Affects the Market
- Final Thoughts
Which Currencies Should You Focus On?
Most brokers offer trading in at least eight major currencies. Almost every day, economic data from these countries is released, providing opportunities for trading currency pairs. The eight major currencies are:
- U.S. Dollar (USD)
- Euro (EUR)
- British Pound (GBP)
- Japanese Yen (JPY)
- Swiss Franc (CHF)
- Canadian Dollar (CAD)
- Australian Dollar (AUD)
- New Zealand Dollar (NZD)
From these, several liquid currency pairs are popular among traders:
- EUR/USD
- USD/JPY
- AUD/USD
- GBP/JPY
- EUR/CHF
- CHF/JPY
Because the U.S. dollar is involved in 90% of all currency trades, U.S. economic releases generally have the most significant impact on the forex market. However, each of the major currencies is influenced by its country’s economic data, providing a constant stream of trading opportunities.
Key Economic Reports to Watch
When trading forex based on news, it’s crucial to know which economic reports are expected each week. Some reports have a more substantial impact than others. The most important economic indicators relate to changes in interest rates, inflation, and economic growth, such as retail sales, manufacturing output, and industrial production. Here are some key reports to watch:
- Interest Rate Decisions: Central banks, like the Federal Reserve, set interest rates. Changes in interest rates can have a significant impact on currency values.
- Retail Sales: This measures consumer spending, which drives much of the economic activity.
- Inflation Reports: These include the Consumer Price Index (CPI) and Producer Price Index (PPI), which measure changes in the cost of goods and services.
- Unemployment Data: Employment levels indicate the health of an economy. Higher unemployment can lead to lower currency values.
- Industrial Production: This measures the output of factories and mines and indicates the strength of the industrial sector.
- Business Sentiment Surveys: These surveys, such as the Purchasing Managers’ Index (PMI), gauge the confidence of business leaders about the economy.
- Consumer Confidence Surveys: These assess the confidence of consumers, which can predict future spending.
- Trade Balance: This measures the difference between a country’s exports and imports. A trade surplus or deficit can influence currency values.
- Manufacturing Sector Surveys: Similar to business sentiment surveys, these provide insight into the health of the manufacturing sector.
The importance of these reports can vary depending on the current economic climate. For example, during periods of economic uncertainty, employment data might be more closely watched than trade balance figures.
How News Affects the Market
News can have a significant impact on the forex market. According to a study, the market often continues to react to news releases for hours or even days after they are published. The most significant price movements usually occur within the first two days, but the effects can linger for up to four days.
For example, if a major economic report, such as the U.S. non-farm payroll numbers, comes in better or worse than expected, it can cause significant volatility in currency pairs involving the U.S. dollar. Traders need to be aware that the initial reaction might be followed by additional movements as the market fully digests the news.
Practical Tips for Trading News
- Know the Schedule: Stay updated on the economic calendar to know when key reports are due. Many financial news websites and trading platforms provide this information.
- Understand Market Expectations: Besides the official consensus forecasts, pay attention to “whisper numbers,” which are unofficial estimates that can influence market sentiment.
- Focus on Major Releases: Not all reports have the same impact. Prioritize interest rate decisions, inflation reports, and employment data.
- Use Risk Management: News trading can be volatile. Use stop-loss orders to manage risk and protect your capital.
- Analyze the Context: Consider the broader economic environment and how different reports might interact. For example, rising inflation and strong employment data could both point to potential interest rate hikes.
Final Thoughts
The forex market is highly responsive to economic news from the U.S. and around the world. To trade forex successfully based on news, it’s essential to know when reports are released, understand their significance, and develop a strategy for trading on this information. By staying informed and managing risk effectively, traders can take advantage of the opportunities that economic news provides.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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