In this article we’ll look at the impact of economic factors underlying elements on Forex or the currency market. This is fundamental information that every good trader should know, so if you are practising for the first few times, keep in mind what we cover in this lesson. Before listing some of the most important indicators and their impact on the markets, keep in mind that:
- Indicators are based on macroeconomic elements and we will examine them in relation to the various financial markets
- A positive relationship is given when an increase in the macro indicator follows a rise in market quote
- A negative relationship is given when an increase in the macro indicator follows a fall in market quote
- A strong relationship indicates that market variation is very likely when there is a change in the indicator
- A weak relationship indicates that market change is more uncertain (less likely) when there is a change in the indicator
As you can see, this is a really interesting and compelling topic, as you will now begin to understand when and why markets follow certain macroeconomic events.
Indicator Relations/Forex Market
So let’s see what happens on the currency market, or Forex.
- GDP: Positive – Weak
- Unemployment: Negative – Weak
- Inflation: Negative – Strong
- Interest rates: Positive – Strong
Well, following the indications given in the first part of the article, we find that while GDP and Unemployment figures are fairly uncertain, inflation and interest rate data is highly relevant since it is very likely that a change in these indicators follows a change in the market. We will say that the relationships between GDP and unemployment and the Forex market are weak relationships, while the relationships beween inflation and interest rates and the Forex market are strong relationships.
If GDP increases, there is a probability, although uncertain, that the value of the reference currency will also increase.
If unemployment rises, there is a probability, although uncertain, that the value of the reference currency will decrease.
In the case of inflation, the relationship is negative-strong, so it means that when inflation rises, the market value of the reference currency decreases. In other words, if an inflation rate rises in the Euro area, the euro will most likely fall in value.
In the case of interest rates, however, the relationship is positive, i.e., if interest rates rise, the value of the reference currency will also rise. Therefore, if the ECB raises rates, the value of the euro will probably also rise.
While there are many weak relationships in the Forex market, in most markets such as bond and equity, most relationships are strong.
Go to the next lesson – Guide to Forex Indicators