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Despite its size, the forex market looks relatively smooth to a normal eye. When you look at the most popular currency pairs, there aren’t any crazy gaps that you often see with stocks.
Thanks to its liquidity and accessibility, Forex can seem a lot tamer than it is. Still, the look can be deceiving. Around the world, armies of analysts, employees and other numerals collect the data for critical reports around the clock.
This is the news that drives the market and leaves a trail of traders who are both riches and rags. Read on to learn more about what is moving the forex market and how you can prepare for such events.
What is the Forex Market?
The foreign exchange market (Forex) is the global foreign exchange market. Aside from the derivatives market, it is the largest financial market in the world, with trillions changing hands every day. It is also the most liquid of all financial markets. Due to its decentralized structure, it trades in the open market (OTC) 24 hours a day, 5 days a week.
Since exchange rates represent the ratio of one currency to another, every transaction involves buying one currency and selling another currency at the same time. This price is also known as the rate and shows the value of a base currency compared to the value of another (counter) currency.
For example, the euro trades as EUR / USD against the US dollar, while the US dollar trades as USD / JPY against the Japanese yen. Other major currencies are the British pound sterling (GBP), the Australian dollar (AUD), the Swiss franc (CHF), the Canadian dollar (CAD) and the New Zealand dollar (NZD). Some currency pairs have nicknames, the most common being Cable for GBP / USD and Loonie for USD / CAD.
In addition to the major pairs (the most liquid), there are minor pairs in which the main currencies are traded against each other (e.g. EUR / GBP, GBP / JPY).
In addition, there are also exotic pairs when a major currency is traded against a currency from a small or emerging economy (e.g., US dollar and Thai baht – USD / THB). Finally, there are regional pairs – those that are tied to a region (e.g. AUD / NZD).
What is moving the market?
Consider these reasons.
Central bank meetings (rate decisions)
By far the most important news in the forex markets. The central banks conduct monetary policy by setting the base rate. This rate determines the interest on lending between institutions and thus controls the flow of money in the economy.
The central bank boards usually meet several times a year to vote on interest rate policy. The options are to raise, lower, or hold interest rates. Recent trends have seen the US interest rate rock bottom after the Federal Reserve Bank cut the interest rate to zero while stimulating the economy by making funding cheaper.
In addition to the Federal Reserve’s Open Market Committee, the European Central Bank (ECB), the Bank of England (BoE), the Reserve Bank of Australia (RBA) and the Bank of Japan (BoJ) are other key decision-makers.
Employment data
Unemployment data is vital as it assesses the overall state of the economy. While all countries regularly publish this data, the top employment news hits on the first Friday of the month when the US Bureau of Labor Statistics releases the report on Non-Farm Payrolls. It shows the change in employment without taking seasonal agricultural employment into account.
US dollar crosses typically see wild swings during this event as the global market digests the news. It’s not uncommon for the price to move above 1% in either direction.
Economic growth
Every quarter, investors look for gross domestic product (GDP) reports that assess the overall health of the economy. These reports show the annualized change in the inflation-adjusted value for all goods and services created in the economy.
Since forex trades in pairs, if a country misses its GDP estimates, it is enough to trigger a violent reaction as investors rebound to sell it to buy the more promising.
inflation
A hot topic recently, inflation is measured by the change in the price of a standardized basket of goods and services. This index is known as the consumer price index (CPI). This is another monetary policy control tool as central banks monitor inflation for clues about changing interest rates. While the data appears monthly, it is often compiled in quarterly and annual reports, which are often presented as changes from the previous year.
Unfortunately, the CPI is not the perfect measure as it suffers from two distortions. First, there is a substitution bias as consumers tend to switch purchases based on the elasticity of demand. The second is a quality / new item bias as the shopping cart tracks price but doesn’t take into account quality improvements for certain goods. This is evident in some of the rapidly evolving tech products like cell phones.
Retail sales
They are often used as a leading indicator because they are published monthly. Therefore, their impact in macroeconomic reports such as the quarterly GDP reports remains to be seen.
When consumers feel safe, they will spend more, which will lead to an increase in economic activity. However, if productivity and wages don’t rise while retail sales rise, it may be an indicator that people are stocking up for a slowdown. Hence, retail sales shouldn’t be the only source of sentiment.
Research is key
Quality research takes time and dedication. For Forex, this is best done on the weekends when the markets are closed.
Here are some guidelines for doing actionable forex research:
- Keep a weekly news schedule: Look for high and medium impact news and plan your trading plan accordingly.
- Check the financial media: Financial media often publish special reports and coverage before major market news. This sometimes includes early estimates and analyst revisions. Make use of this material.
- Compare the seasonality effects: Currency pairs have seasonal tendencies that have been studied over the decades. Remember, the seasonal effect often acts like gravity.
Keep an eye on the news
While the market is typically moving most of the time, different types of news reports require your attention.
If you are a day trader, part of your morning routine is to review the news schedule to avoid unnecessary risk. If you are a long term trader, you need to watch out for basic news to manage your existing positions and preferably avoid entering new positions just before the news events.
This does not mean that trading around the news cannot be profitable. But for those who aren’t seasoned professionals, it turns out that it’s often like picking pennies in front of the bulldozer.
frequently asked Questions
What is it that moves the foreign exchange market the most?
1
What is it that moves the foreign exchange market the most?
asked 2021-07-15
Stjepan Kalinic
1
Interest rate decisions are by far the most influential piece of information moving the forex market. There are 8 central banks around the world that control their local currency through monetary policy. On the basis of fundamental data such as inflation, gross domestic product, employment level or consumer spending, they decide whether or not to change interest rates. If this change occurs unexpectedly, it leads to extreme volatility in the market.
Reply link
answered 2021-07-15
Benzinga
Who Really Controls the Forex Market?
1
Who Really Controls the Forex Market?
asked 2021-07-15
Stjepan Kalinic
1
The foreign exchange market is decentralized. There is no single agency like a regulator that controls them. The market is determined by governments who act on it through their central banks (to conduct monetary policy) and commercial banks (to conduct business).
In essence, only a few global commercial banks cover most of the foreign exchange volume.
Reply link
answered 2021-07-15
Benzinga
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source https://thedailytradingnews.com/what-moves-the-forex-market-the-most-an-analysis-benzinga/
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