Whenever you check the coming economic releases, you’ll probably notice certain events that stand out more than others. Brokers categorize them as “important” and traders following them prepare for a significant breakout after the release. But just how much value does fundamental analysis offer, and how does an economic release actually give an indication of which way the price will go?
Here are 7 major economic events that always stir the markets in a predictable way:
As the name suggests, the Consumer Confidence Index indicates how much of the population’s income is spent on a monthly basis. High consumer confidence stimulates economic expansion, while low figures indicate—and can even trigger—an economic downturn. If the consumer report provides positive figures for the base currency, then fundamental traders generally click the ‘Buy’ button. A low reading indicates a bearish market, making ‘Sell’ a more attractive option.
The CPI details the retail price levels for the nation. A nation’s pricing level acts as an indicator of future inflationary measures to keep an economy fluid. The CPI doesn’t directly influence a currency price, but inflation does affect how a currency will rank in the forex markets. Take a look at the economic calendar for this week. If you see a CPI release on the list, write down the forecasted figure. If the actual release exceeds expectations, then consider a ‘Buy’ order. By placing your order soon after the CPI release you can get the full range of the rise or fall—but watch out for volatile price spikes in the first few minutes.
A GDP release details the last 3-months of growth (or weakening) of a nation’s economy prior to an official announcement. Fundamental traders consider the GDP report as a highly reliable indicator of a nation’s monetary policy and economic health. If a GDP release exceeds the estimate, traders favor the ‘Buy’ button. Beware, the first few minutes after a GDP announcement can start with extremely volatile trading conditions. Such volatility can trigger stop orders and stop outs. Either choose a modest leverage setting, or wait for the initial eruption to subside before placing an order.
The Industrial Production Index indicates the volume of a nation’s manufacturing and production. If the report indicates high industrial production for the period, it can generate positive sentiment. Less volatile than GDP, the effect of the Industrial Production Index on the market tends to influence price shifts over a longer period than some of the other releases. Don’t rush into an order, and perhaps consider a longer timeframe when setting ‘Stop Loss’ and ‘Take Profit’.
The NFP accounts for the number of new (not farm-related) jobs created in the previous month. The NFP is one of the most volatile releases as it has a direct relationship with economic policy and banking influences. A higher-than-expected announcement promotes positive market sentiment for the nation’s currency and suggests a ‘Buy’ order might be the preferred trade. The NFP release can also trigger epic price spikes in the first few minutes, so make sure you have plenty of margin to survive the swings, or wait for the volatility to subside before opening a position.
The Retail Sales Report indicates—as it sounds—the total retail-related sales nationwide. In general, retail sales levels indicate consumer spending. While consumer spending doesn’t influence a currency’s price directly, it does help to show a nation’s general economic status. If spending stays high, then the nation’s confidence and overall sentiment suggests economic growth is coming. If the Retail Sales Report exceeds the forecast, consider a ‘Buy’ order.
The Unemployment Rate reveals the health of the private sector as a whole. Whenever the economy weakens, businesses struggle, and unemployment rises. Therefore, a rise in unemployment indicates a weakening economy. Unemployment reports can influence the market’s price in very unpredictable ways, and occasionally contradict other economic releases, but if a trending rise in unemployment occurs over multiple reports, then consider a ‘Sell’ order.
Economic releases happen every day, all over the world. If, for example, you like to trade EURUSD, remember that both Europe and the US often issue data releases in the same week. A strong GDP for the eurozone might coincide with a strong CPI from the US. Many economic and political factors push and pull forex prices, so dig a little deeper into your target currency pairs before you place an order. Check news articles and political reports, and always keep an eye on the price charts.
If you decide to test fundamental analysis as part of your trading strategy, stick to low investments or the demo account for the first week. Whenever a currency pair doesn’t react to the release as expected, then investigate the reasons and take notes. Rain clouds indicate rain, but only if the wind blows in the right direction. In other words, don’t jump just because trading conditions seem right. Account for as many factors as possible before investing.
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