Why economic data matters

If you're new to forex trading, you may ask why experienced traders closely monitor economic calendars and news releases. The reason is simple: currencies represent economies, and economic data tells us how those economies are performing. Consider economic indicators as diagnostic tools for measuring an economy's strength. They help traders predict which currencies might strengthen or weaken.

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Key economic indicators that influence forex markets

Gross domestic product (GDP)

GDP measures everything a country produces, from goods to services. A rising GDP generally strengthens a currency, while a shrinking GDP can weaken it. For example, if the UK's GDP exceeds expectations, the British pound may rise against other currencies.

Labour market data

Employment data often significantly influences currency values. In the US, key labour indicators include:

• Unemployment rate. The percentage of unemployed individuals in the labor force.
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• Average hourly earnings. A measure of wage growth, which impacts consumer spending.
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• Non-farm payrolls (NFP). The number of new jobs added, excluding agricultural positions.

Stronger-than-expected job reports usually boost a currency's value, while weak numbers can cause a decline.

Interest rates and Central Bank decisions

Central banks, like the Federal Reserve, European Central Bank, or Bank of England, set interest rates, which impact currency values. Higher rates often attract foreign investors, strengthening the currency.

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Key things to watch:

• The actual rate decision vs market expectations.
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• Forward guidance (hints about future rate changes).
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• The tone of accompanying statements (hawkish = likely to raise rates, dovish = likely to cut rates).

Inflation metrics

Inflation plays a crucial role in interest rate decisions. The Consumer Price Index (CPI) tracks price changes over time. Central banks typically target inflation around 2%. Higher inflation may lead to interest rate hikes, strengthening the currency, while low inflation could result in rate cuts.

Trade balance

This metric compares a country's export and imports:

• Trade surplus (more exports than imports) → Strengthens the currency.
• Trade deficit (more imports than exports) → Weakens the currency.
  
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How news drives market movements

Central bank announcements

These are among the biggest market movers. Markets react to:

• Rate changes.
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• Bond-buying program updates.
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• Changes to economic forecasts.
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• Policy statements.

Even subtle changes in language can prompt significant currency movements.

Economic data releases

• Stronger-than-expected data → Typically strengthens a currency.
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• Weaker-than-expected data → Usually weakens a currency.
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• The bigger the surprise, the bigger the market move.
  
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‍Political & geopolitical events

Major political events can have long-term effects on currency markets:

• Elections
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• Brexit-style referendums
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• Trade agreements/disputes
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• International conflicts

Managing exposure during economic announcements

Using an economic calendar

• Review the calendar daily, noting each event's impact rating (high, medium, or low).

• Compare previous figures with forecasts.
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• Watch for clusters of important releases.

Risk management during news events

Market volatility increases around big news events. Spreads often widen, and price swings can be unpredictable. Consider these strategies:

• Avoid trading during high-impact news events unless your strategy accounts for sharp volatility.
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• Widen your stop-loss to avoid being stopped out too soon.
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• Reduce position sizes to manage risk.

Common news trading strategies

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Important forex trading considerations

• Different economic indicators have different impacts on currencies.
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• Market reactions vary based on economic conditions.
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• Multiple data releases can create conflicting signals.
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• Market responses aren’t always logical or predictable.
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• Past reactions don’t guarantee similar future moves.

Getting started with forex economic indicators

• Follow key indicators like GDP, interest rates, and employment reports.
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• Observe how your chosen currency pairs react to news.
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• Maintain a trading journal recording how markets respond to key economic data.
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• Start with demo trading before applying strategies to live trades.

Economic indicators are crucial for understanding market movements, but they’re just one piece of the puzzle. Successful traders combine economic data with technical analysis and sound risk management.

Expand your understanding of forex with our free courses on Deriv Academy courses. Practise on a free demo trading account before applying your knowledge to live markets.

Log in to Deriv Academy using your Deriv account email and password to get started.

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