The currency of a given country does not become weak or strong for no reason. A large proportion of the value of a currency is based on the confidence of the economic strength of its country of origin. Economic strength is judged by certain indicators that are closely followed when trading Forex. When these indicators change, the value of the currency may fluctuate. When a country’s economic health is in good shape, it means that its currency is strong, or well quoted against other currencies.
Fundamental analysis in Forex has become an important point because economic indicators have definitely become factors that move the market. When we focus on the impact that economic numbers in one country have on the action of Forex prices, there are 5 indicators that are observed more than the others, due to their impact on the market. These economic indicators are:
1. Non Farm Payrolls: Jobs created or lost in the USA in the last month
2. Interest Rate Decision: The decision to raise, lower or maintain interest rates.
3. Trade balance: Trade balance
4. CPI – Inflation: Price of the basic basket and Inflation and
5. Retail Sales: Retail Sales
Apart from knowing the date of the announcement of the indicators, having a good economic calendar at hand for Forex, it is of vital importance to know what are the predictions of economists regarding the indicators. For example, knowing that a good number of new jobs generated in the U.S. for a month is 250,000 is not as important as knowing what economists’ predictions were regarding the result.
Many times the predictions are wrong, and in those cases there is a sudden change in the market. If economists believed that there would be 250,000 new jobs generated in January, but only 100,000 were created, this will weaken the U.S. economy and therefore make it your currency (USD), with respect to the others.
These indicators give opportunities to make good operations in the Forex market, because the prices often shoot several points to one place or another depending on whether the number offered by the indicator coincides or not with the expectations of economists, and this usually happens in the first 30 minutes after the announcement has been spread.
Below we will discuss each of the most important news in order of relevance to fundamental Forex analysis.
1. Non farm payrolls – Unemployment Rate
The unemployment rate measures the labor market force. One of the ways analysts measure the strength of an economy is by the number of jobs created and the percentage of workers unable to get a job. Many jobs created in a month is indicative of economic growth, as companies must increase their workforce to meet demands.
This indicator shows an average pip movement of 124 during the first 20 minutes after its announcement.
2. Interest Rate Decision
The Federal Open Market (FOM) decides the discount percentage, which is the percentage with which the Federal Reserve Bank charges its member banks for loans. The percentage is decided during FOM meetings with regional banks and the Federal Reserve Board.
This indicator shows an average pip movement of 74 during the first 20 minutes after its announcement.
3. Trade Balance
The trade balance measures the difference between the value of the goods and services a nation exports and the value of the goods and services it imports. A good trade balance indicates that the value of what is exported is greater than the value that is imported, and a deficit trade balance is one in which imports are greater than exports.
This indicator shows an average pip movement of 63 during the first 20 minutes after its announcement.
4. CPI – Inflation
The CPI is key to inflation, as it measures the price of a basic basket of consumer goods. High prices are considered negative for the economy, but since the Central Bank generally responds to inflation by raising interest rates, currencies sometimes respond positively to an increase in inflation.
This indicator shows an average pip movement of 44 during the first 20 minutes after its announcement.
5. Retail Sails
Retail sales show the economic momentum of a country based on the country’s commercial activity. This indicator shows an average pip movement of 43 during the first 20 minutes after its announcement.