Forex traders need to be aware of the various economic indicators and data releases that shape the direction of the financial markets. Knowing what data to look out for, what each release means and how it relates to currency prices is one of the basic foundations that every trader will need to have in their arsenal.
Although every country will have indicators that are uniquely important to it, the major drivers of currency exchange rates are common between regions. Here, we look at three of the most common and important data releases that you can expect to influence your trading every month.
1 – Interest Rate Decisions
Every month, the central banks of the world’s largest economies make several important announcements about the direction of their fiscal and monetary policy. The most important of these is the decision over the country’s interest rates.
Central banks can choose to raise rates, lower rates, or leave them unchanged. These decisions are probably the single most important factor affecting the currency of a country’s economy, and is therefore critical for traders.
Raised interest rates are generally seen as bullish for the currency, while lower rates are generally seen as bearish for the currency. For example, when the US Federal Reserve raises interest rates, this is likely to drive the price of the dollar upward. To take the opposite example, if the Bank of Japan was to announce a lowering of interest rates in Japan, this would usually lead to a fall in the price of the yen.
While the decision of the rate itself is the key determining factor, the expectations of what future announcements will consist of are almost equally as important, as investors will often attempt to factor future rate decisions into their current trading in order to stay ahead of the curve.
2 – Policy Statements
When announcing their interest rate decision each month, central banks also follow up the decision with a speech that indicates its reasoning for the interest rate decision and outlines its view on the economic situation facing the country.
Currencies are often most volatile during these policy statements, as the market attempts to interpret their remarks as either supporting or weakening the exchange rate of a currency.
Central banks will often use the statements, to address and neutralise mounting speculation within the markets. On occasion, central banks will also purposely use language that they think investors will interpret as bullish or bearish in order to achieve the desired effect on the exchange rate of the currency.
For example, during a recent speech by the Governor of the Central Bank of Australia, Glenn Steves said that the country would prefer a weaker national currency in order to increase demand for exports and rebalance the economy. This statement may likely have been intended to purposely weaken demand for the Australian dollar and lower its exchange rate.
3 – CPI (Consumer Price Index)
A Consumer Price Index (CPI) measures changes in the overall cost of goods and services and it is used mostly as an indicator of inflation within an economy. It is used to measure stability of prices in the economy and can be a driver of currency volatility when investors think that the CPI is indicating an unexpectedly high or low rate of inflation.
When the released CPI data is greater than market expectations, this is generally expected to have a strengthening effect on the exchange rate of a currency, whereas if the CPI data is below market expectations, the currency is expected to weaken.
Investors look at inflation rates to judge the health of the economy. When inflation rates are within the central bank’s target, it acts as a stabilising force on the currency. Whereas if inflation targets are far off track, this could lead to increased volatility up or down.