The forex exchange is an international market where individuals who trade, work in commerce, or finance can easily change their national currencies to another. Many individuals speculate on the price of the money and exchange it accordingly to gain a profit, known as forex trading.
The marketplace is stable, but some factors can impact the forex market. The currencies of a country in the market are usually affected by the country’s economic status. Hence, you will need to look for financial news if you are trading currencies.
Economic calendars make it easy to keep up with the important news affecting the forex market. But, there are still hundreds of news to go through. So how do you know which ones to look out for?
Here’s our take.
A Non-Accelerating Inflation Rate of Unemployment (NAIRU) has been set in place to ensure that inflation does not get out of hand by setting a certain level of unemployment. The central banks are responsible for ensuring that any monetary policy established is set close to NAIRU.
If the unemployment rate falls below NAIRU, the banks will increase their interest rate to control inflation. Participants in the forex trading market look closely at these unemployment rates since they become the leading indicator of any monetary policy decision.
In hindsight, this can minimize the profit margin or lead to a loss in the forex trading market.
GDP Growth Rate
The GDP growth rate measures the health of an economy. A strong currency will have a high growth rate, making it easier for any trader to recognize where the pair will be moving in the upcoming days.
To compare, a country’s rising or falling GDP will assess whether the trader will be experiencing a bearish or bullish cycle. Suppose country A’s GDP growth rate is higher than country B’s; you can interpret that a bearish process is incoming for country A’s currency. Hence, you won’t be trading or investing in country A’s currency.
Consumer Price Index (CPI)
Central banks have policies that ensure inflation does not exceed a specific rate. If it does, the bank increases its interest rate to decrease inflation. The CPI measures this rate of inflation.
Usually, an economic comparison is made to a base year, which decides the inflation rate. A growing CPI rate would indicate bullish news for the currency as a trader.
As of June 2022, the CPI of Europe is standing at 117 points which is an increase of 6.3 points since January 2022. The growing numbers can result in an increased interest rate and hence, a stronger currency.
Overnight Interest Rate
The overnight interest rate may be a key player in the price fluctuations of the forex market. This rate is generally used for lending and borrowing money between banks.
During this transaction, central banks try to influence the overnight rate to strengthen their monetary policy arsenal. Understanding this concept is quite tricky, but it is crucial.
In simpler words, if overnight interest rates are increased, they will likely affect market prices. Hence, if you receive such news, it is expected that a bullish effect is about to take place.
Staying updated on the international economic happenings can help you make better investment decisions. While political instability or civilian strikes also impact the forex market, it is beneficial to pick up the critical news that affects the overall market.