Fundamental analysis
Key factors that affect the forex markets
Finally, in this course we’ll take at some other factors to consider as part of your forex fundamentals.
- Economic indicators and announcements
- Other factors that affect the forex markets
- Finding events with the FOREX.com economic calendar
Economic indicators and announcements
The GDP, NFP, and CPI releases might be some of the most important dates for currency traders, but there are a lot more market-moving events to pay attention to.
Here’s a quick guide covering three important economic indicators: consumer and business sentiment reports, PMI, and retail sales.
1. Consumer and business sentiment report
Multiple organizations are constantly surveying consumers and business leaders to create sentiment reports. While the number of reports they produce is staggering, they all play their part in shaping the market’s expectations for the future.
Why are consumer and business sentiment reports important?
An economy needs businesses and consumers to spend in order to thrive. If businesses and consumers are feeling apprehensive about the economy, then spending tends to be lower – which may impact growth, employment, and inflation down the line.
As such, these reports tend to be leading indicators. While employment and inflation figures are reported on past quarters, sentiment reports can give you an insight into what’s going to happen next.
2. Purchasing manager index (PMI)
Purchasing manager indices measure the prevailing direction of economic trends in a given industry, according to the view of its purchasing managers. They are used as an indicator of the overall health of a sector.
Like price indices, there are typically multiple different PMIs released for any given economy.
- A PMI figure of above 50 indicates that managers believe that their business is performing better in the current month than the previous one
- If it is below 50, then managers have seen less activity this month than the last
- If it is at 50, then the current month is on par with the previous one
Why are PMIs important?
PMIs are used to get a quick on-the-ground assessment of how a sector is performing from the people working within it. If a key sector in a country is stalling, then the economy may soon follow. On the other hand, if it is thriving, growth could be on the horizon.
3. Retail and vehicle sales
Retail and vehicle sales are two indicators that measure demand for finished goods and demand within the car industry respectively.
Why are retail and vehicle sales important?
As we’ve seen, economies run on consumer spending. Retail and vehicle sales offer a direct measurement of spending, informing traders whether consumption is trending up or down.
Retail sales figures give a much broader view of spending and are typically compiled by the government each month. While narrower, vehicle sales can be a little bit more expedient as they are released by businesses themselves. Many traders believe that vehicle sales can offer an insight into general spending, so will use them as a leading indicator for the retail figure.
Other factors that affect the forex markets
Forex fundamental analysis isn’t all about economic data, though. Here are four other considerations to take into account.
1. Government announcements
Governments are responsible for fiscal policy, which also has a major impact on currencies.
To fund a new infrastructure project, for example, the government will have to borrow money in the form of bonds to sell to investors.
Fiscal stimulus measures are agreed upon by governments, and sometimes a vote needs to take place to make the stimulus into law. It pays to keep up to date with breaking news events to ensure you don’t miss these crucial decisions.
2. Market sentiment
In its simplest form, fear can turn a falling instrument into an all-out panic, and greed can turn a rising market into a blind-buying spree.
The crisis in the Eurozone, particularly in Greece, in the 2010s led to the extreme selling of EUR as fear dominated mainstream thought. Soon after, though, greed kicked in and drove the currency to levels that were detrimental to employment and inflationary dynamics. The European Central Bank had to force devaluation through a variety of market mechanics.
While it may be easy to point out the effects of fear and greed on markets after they have acted upon them, choosing the moment when they flip in the present is difficult.
3. News
Not all news events are equal.
For instance, as a general rule, employment reports tend to move markets more than a manufacturing sales report, and a retail sales figure riles things up more than a monetary supply report.
The Economic Calendar is a great resource to help you determine which reports provide the most punch. While not all-important, news events move the needle when they happen. They have the highest probability of doing so, and knowing when the markets will move can be one of the greatest advantages you have as a trader.
4. Options
Most of the volume traded in FX options is for international business purposes, meaning that businesses can hedge the risk of currency value changes. However, a growing segment of the volume traded is going toward speculation.
Double No Touch (DNT) options are the specific type of option that interests FX traders the most. These types of options are usually placed on round numbers in popular currency pairs like the EUR/USD or USD/JPY and are often targeted by extremely liquid investors. If a currency pair moves quite a bit and it nears these psychological points of interest, sometimes it surges beyond that level and then retreats away from it just as quickly. Other times, the market gets close but never quite gets there before backing away from that level.
Finding events with the FOREX.com economic calendar
Follow these steps to set up the FOREX.com economic calendar to your requirements:
- Head over to the economic calendar
- Hit SHOW FILTERS. Here, you can filter events by country, category, and volatility
- Choose the countries related to your chosen pairs, then hit APPLY FILTERS
- Now, you’ll only see events for your markets. The marker to the right tells you whether high, medium, or low volatility is expected
- You can also see any consensus on where data might land, in the Consensus column
