WHAT MAKES THE FOREX MARKET MOVE?

Lagging Indicator

A lagging indicator is a measurable economic factor that changes only after the economy has begun to follow a particular pattern or trend.

There are many factors and forces behind the movement of currencies in the FX market. Given the unique and complex nature of each and every economy around the globe, it is almost an impossible task to identify all the forces that drive currency prices. 

 

Forex market reacts to all the supply and demand factors such as interest rates, gross domestic product (GDP), inflation, government policy, economic health, and many other factors. People read these facts and each interprets them differently and takes positions based on their interpretation of the fact. 


 Of course, opinions and interpretations differ from one person to another and they all draw different conclusions from the facts they see. Therefore, this causes prices to go in a different direction to where generally majority of the traders think they will. 

Currency Pairs.png
Currency Pairs.png

There are generally fundamental factors that move the currency market.

Below are the four most important economic releases that move the forex market.


1) Interest rates


Interest rate movements are among the most powerful fundamental factors that move the forex market. They are set by central banks.


Generally, higher interest rates increase the value of a country's currency. Higher interest rates tend to attract foreign investment, increasing the demand for and value of the home country's currency.


Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency's relative value.

One of the most anticipated interest rate decisions is released by the federal reserve followed by the Federal Open Market Committee (FOMC) meeting that releases a statement to inform the general public of its monetary policy decision, regardless of whether or not rates have been changed. It is scheduled 8 times a year and it is released at 2:00 pm ET.


This specific economic release has a high impact on the Forex market and has a direct impact on the US dollar currency pairs (Major Pairs).


Federal Reserve interest rate decisions can move the market substantially in a very short period of time usually seconds after its release. Thus traders have to take extra caution when such important economic news is about to be released.


2) Non-Farm payroll


Another very important economic news is Non-farm payroll. Non-farm payroll figures refer to any job in the economy with the exception of farm work and other situations such as those employed within the military and intelligence agencies.


This release holds such influence because it provides a gauge for investors to determine whether corporations are hiring. If the report comes strong and improving, it can suggest that companies are expanding and hiring new labours and the new labours have money to spend, which will, in turn, fuel broad economic growth.


Growing workforces and a strong economy will often lead to a strengthening currency.


It is released by the Bureau of labour statistics and it is released monthly, usually on the first Friday after the month ends at 8:30 am ET.


It usually comes out at the same time as the Canadian unemployment rate, thus it can move the market substantially. The currency pair affected directly by both of these releases is the US dollar versus the Canadian dollar (USD/CAD).


3) Retail Sales


Retail sales is another high-impact economic release, it is the primary gauge of consumer spending, which accounts for the majority of overall economic activity. Retail sales are important economic indicators because they measure consumer spending, which drives the economy and signals its health.


Retail sales data is compiled differently according to each country and their bureau of statistics.


For the United States, the data is divided into US Retail Sales and US Core Retail Sales, which excludes autos and gasoline.


4) Gross Domestic Product (GDP)


GDP is considered the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year. GDP is one of the most-watched economic indicators in the forex market because it signals whether an economy is expanding or contracting and how much it is changing relative to the opinion of analysts.


However, one has to consider that GDP is known to be a lagging economic indicator.


5) Consumer Price Index (CPI)


The consumer price index (CPI) measures inflation. Inflation is important to currency valuation because rising prices lead the central bank to raise interest rates out of respect for their inflation containment mandate.


When inflation is too low, a central bank like the Federal Reserve may cut interest rates to spur economic activity.

When inflation is too high, interest rates may be raised to stabilize prices.


Higher interest rates tend to be attractive for foreign investment and increase the value of a country's currency.

Conversely, lower interest rates tend to be unattractive for foreign investment and decrease the currency's relative value.

Besides the above-mentioned indicators, other major indicators that traders should watch closely include the purchasing managers index (PMI), durable goods report, industrial production, employment cost index (ECI), and producer price index.