Certain types of events have been known to affect the currency market in significant yet predictable ways. These recurring events, which impact both market sentiment and trade volume significantly, act as indicators to identify valuable trading opportunities. They can also act as indicators of future volatility surges, helping traders to stay prepared with appropriate risk management strategies.
Examples of such economic events include interest rate decisions by the US Federal Reserve, US non-farm payroll report, national GDP growth rates, trade balances, and inflation levels. Widely regarded surveys and statistics released by government bodies and analytics companies are also included, as are the minutes of central bank meetings. For example, the US dollar surged on January 6, 2022, as the US Fed indicated that it would accelerate the pace of reducing asset purchases. This also signalled interest rate increases in the near future to tame the persisting high inflation levels.
Navigating the Economic Calendar
Economic calendars have many versions. Given that forex is a global market, traders need to have an all-encompassing one, which enables them to set custom filters by country and currency.
The calendars usually provide a short description of the event, its scheduled date and time, and value for “previous,” “forecasted” and “actual.” The forecasted value tells us what numbers are anticipated by the market for the to-be-released report. It can be a percentage value or currency value. The previous value is the last recorded value of the report. Both these figures impact the market sentiment and price movements right up to the actual event.
For instance, if the market expects that the future unemployment numbers of a nation are likely to be worse than the previous figure, the domestic currency value depreciates against other currencies. This is because increasing unemployment numbers indicate declining economic health, which makes the currency of that nation seem less appealing to investors. A large number of traders might then assume a short position on that currency, leading to a decline in its price.
Let’s take a real example of the US non-farm payroll (NFP) numbers, released on January 7, 2022. The December report showed 444,000+ job additions to the US economy, which was better than the November 2021 job additions of a dismal 210,000. If the actual numbers of the January report are lower than expected, it could lead to huge volatility in the market, not to mention a decline in the US dollar.
Most calendars have a system to segregate high-impact events from medium-impact and low-impact ones. The US is the world’s largest economy and the US dollar is the global reserve currency. This is why economic events associated with America tend to impact assets globally. Similarly, news releases from major economies like the UK, EU, China and Japan also have an impact on the global financial markets. A trader, therefore, needs to research to estimate the impact of the event on their positions.
The scheduled date and time are also critical to be able to enter or exit the market at the right point. An estimated time is provided by the economic calendar. This should be according to the trader’s local time zone to prevent any miscalculations.
Top News Events to Look for in an Economic Calendar
Before moving on to trading strategies using the economic calendar, here’s an overview of which events could be important for forex traders.
- Central Bank Interest Rate Decisions: Central banks monitor the economic health of the nation they belong to by increasing and decreasing interest rates, as well as other monetary policies. An increase in interest rates could push the domestic currency higher compared to other currencies, and vice versa.
- Consumer Price Index (CPI): This is a measure of inflation. Persistently high inflation levels can lead to the central bank raising interest rates to reduce the money supply in the economy.
- Purchasing Manager’s Index (PMI): This reflects the state of manufacturing activities in a country. A PMI level above 50 indicates economic growth compared to the previous month. This can lead to an increase in currency value.
- US NFP: Although unemployment numbers of any country are important to track the price direction of its currency, the US NFP report is one of the most significant events for forex traders. Released on the first Friday of each month, it tracks the employment rates in the US (except farmers, self-employed workers, and some other factions). It is also an important indicator of the future stance of the US Federal Reserve regarding interest rates.
Trading the Economic Calendar
The economic calendar is used in predicting the price direction of a currency pair. Forecasted numbers or market bias can be an indicator. But rather than placing orders based on them, traders could use the information in the context of their technical analysis.
Traders can look into the current market trend, price direction and strength, and then identify the support and resistance levels up to the news event. If the news release is expected to provide positive numbers, traders might see a surge in price action between those levels. Day traders can take advantage of price volatility leading up to major events. More conservative traders could wait for the volatility to subside post-event, after the market has digested the information.
For instance, here is a popular way to trade the NFP report.
- Traders refrain from trading in the first 15 minutes after the report is released.
- The next step is to check the candlestick chart for an inside bar to occur within the initial bar. The high and low of this bar are the trade triggers.
- Traders can trade in the direction of the breakout when the subsequent bar closes above or below the inside bar.
- A 30-pip stop loss can be placed in the position.
- Most of these moves occur within 4 hours. So, traders can exit their positions within 4 hours. The profit target is a time-based one here.
High impact news releases can lead to slippage, which means a 1% risk trade could end up in a loss of 5%. Because of this unpredictability, forex traders often exit positions minutes or hours before a report release. This means market liquidity can also drop.
Today, it’s becoming increasingly difficult to collect data from businesses and households, which form the bedrock of economic measurement in many cases. This is because of increased costs of traditional modes of data collection, late responses to surveys, and digitalisation of practically all market transactions. This is why alternative data, such as data sourced from websites, can provide a way to gauge the economy accurately and granularly.
In 2019, Bank of England economist Arthur Turrell said how the central bank was leveraging natural-language processing to evaluate 15 million UK help-wanted ads to gauge the labour market. These details cannot ordinarily be collected from surveys.
The economic calendar is important for traders of all styles and experience levels. It forms an important part of their fundamental analysis. Traders need to understand how to use it the right way to better manage their portfolios.