Factors that Affect Currency Value – Part 3

As currency value is directly related to the condition of a country’s economy, the movements of currencies in the market are very often shaped by the release of fundamental data, statistics and measurements which outline the economic state of a country. Such data, known as economic indicators, are usually released by government bodies or private organisations and measure a country’s economic performance, while also giving an outlook for the economy and driving currency rates higher or lower.

Economic indicators, then, indicate economic strength or decline and allow for predictions of future price movement. As such, they are indispensable to fundamental analysis of the forex market. Some popular economic indicators which usually have a significant impact on currency rates upon their release are Unemployment Rate, Consumer Price Index, Non-farm Payrolls, Retail Sales and Gross Domestic Product. These, along with a number of other key indicators, are examined in more depth in Major Economic Indicators.

So, in what way does the release of an economic indicator trigger price movement? To answer this question, let’s take the U.S. Non-farm Payrolls as an example. This is a report that is released on a monthly basis and shows changes in the number of jobs added or lost in the economy in the last month, excluding jobs related to the farming industry. A relatively high reading is considered positive for the U.S. dollar, triggering an upwards movement for the currency in the market, while a lower-than-expected reading usually causes a downward movement. What you should also keep in mind as a trader, though, is that in the forex market currency value is always quoted in relation to the value of another currency. Thus, while an economic indicator like the U.S. Non-farm Payrolls is primarily concerned with the economy of the United States, its release also affects the movements of other currencies such as the pound sterling or the euro, against which the dollar appreciates or depreciates.

As a trader, then, you should always be aware of any major upcoming economic releases and announcements which can trigger sharp market movements in any direction. Forexology offers a very handy Economic Calendar, which shows all indicators due so that you can adapt your trading schedule accordingly.

It is also useful, of course, not only to have an idea of what an economic indicator will show beforehand, but also to be aware of what the market expects and how it is likely to react. Indeed, market sentiment is very important in fundamental analysis, since market expectations are not only able to affect price movements but often do so irrespective of the actual results.

Did you know?

If overwhelmed by pessimism and falling prices, the FX market is defined as “bearish”, while if characterised by optimism and rising prices, it is called “bullish”. These two terms derive from the way in which bears and bulls attack their opponents, with the former swiping its paws downwards and the latter thrusting its horns upwards.

Word of the day
"Swing Trader" - A currency trader who places short-term trades in order to benefit from short-lived trends.
Pro Tip

Most market activity occurs when at least two market centres are open at the same time.