The forex trader community often monitors international news and the publication schedule of developed country economic data. News and data are known to fundamentally influence the movement of exchange rates in the currency market. However, do you know what fundamental news is the most influential and should be paid attention to by forex traders?
You may have heard some popular fundamental news such as the announcement of US central bank interest rates (Federal Reserve) and Non-farm Payroll (NFP). However, the most influential variation of fundamental news is not only these two data. Fundamental news that affects each currency pair also varies depending on the country of origin of the currency.
At the very least, traders should complete these seven (7) important forex fundamental news so as not to get confused: interest rate announcements, Gross Domestic Product (GDP), Consumer Price Index (CPI), Retail Sales, Employment and Unemployment, Production and Manufacturing Industries, and the trade balance. The following is a complete description of each story.
Interest Rate Announcement
Federal Reserve interest rate announcements always affect all major currency pairs as well as developing country currency exchange rates such as the Rupiah. Therefore, forex traders always pay close attention to the meeting schedule and announcements of the Federal Reserve's highest policy board called the Federal Open Market Committee (FOMC).
FOMC meetings are held 8 times a year. Top Federal Reserve officials will discuss the current state of the US and world economies, then decide whether a change in interest rate policy is necessary to respond to these economic conditions. In a post-meeting statement, the FOMC may announce interest rates fixed, lowered, or raised. If interest rates are raised, the US dollar will strengthen. Meanwhile, if interest rates are lowered, the US dollar will weaken.
In addition to the Federal Reserve, the central banks of other countries also hold regular policy meetings. These include the Bank of Japan (BoJ), European Central Bank (ECB), Bank of England (BoE), Swiss National Bank (SNB), Bank of Canada (BoC), Reserve Bank of New Zealand (RBNZ), and Reserve Bank of Australia. (RBA). Decisions taken at the meeting will affect the currency associated with the relevant central bank.
Gross Domestic Product (GDP)
The release of quarterly GDP data includes fundamental news that has the most influence on currency exchange rates. Why is that? Because GDP adds up the total value of goods and services produced by the economy in the previous quarter. Thus, the data shows how the overall picture of economic conditions is.
Traders usually ignore nominal GDP data, but highlight the pace of GDP growth over time. The ideal GDP growth is not only higher than the previous period, but also meets market expectations. If a country's GDP growth exceeds expectations, the currency exchange rate will strengthen. Meanwhile, if GDP growth is below expectations, the exchange rate will weaken.
Consumer Price Index (CPI)
The consumer price index report is mainly used to measure the rate of inflation or deflation. Inflation is an increase in the price of goods and services continuously within a certain period of time in a region. While deflation is the opposite condition, namely a decline in prices. CPI data are usually published monthly.
Measuring the impact of CPI data on the forex market is a bit tricky. This is because inflation rates are expected to match different central bank targets. Inflation that is too low or too high will have a negative impact on currency exchange rates. To understand the impact of this data, traders need to know each central bank's inflation target.
Currently the Federal Reserve, ECB, BoJ, BoE, BoC have set an inflation target of 2 percent. The RBA is targeting a 2-3 percent range, while the RBNZ is targeting between 1-3 percent. Bank Indonesia sets a different interest rate target every year, usually between 3-4 percent with a standard deviation of 1 percent.
Retail sale
Retail sales data collects the number of goods sold by shops throughout the country, be it bookstores, hypermarkets, malls, wholesale stores, and so on. Data are usually published monthly. However, data fluctuations can be very high, especially before and after the holiday seasons such as Christmas, New Year, Chinese New Year, and Eid.
All major currencies will be affected by US retail sales data. In addition, retail sales data from the UK will also have a high impact, as the country's economy is driven by consumers.
Employment and Unemployment
This data is also released monthly by the relevant agencies. The data collected can cover various matters relating to employment, including unemployment rate, number of new jobs created (employment), average income (average earning), and labor force participation rate (participation rate). Specifically for United States employment data, there is also Non-farm Payroll (NFP) data which shows the total number of employees employed in the previous month in all non-agricultural economic sectors.
All major currencies will be affected by US employment and unemployment data. However, the exchange rates of other countries' currencies will also be influenced by their respective employment data. Why is that? Because employment status is one of the drivers of the economy. The more unemployed, the lower the salaries of employees, the worse the future of the country's economy. On the other hand, the better the absorption of labor in a country, the higher the growth in employee salaries, the better the economic engine will work.
Industrial Production and Manufacturing
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Industrial Production and Manufacturing Production Data shows how well business activity is in a country. Usually released every month. If this data exceeds expectations, it means that the economy is developing well and the exchange rate will strengthen. However, if the data is below expectations, it means that economic growth is slowing, so the exchange rate tends to weaken.
Trade Balance Data
Trade Balance data collects a country's total imports and exports and then subtracts them. If imports are higher than exports, it means that there is a trade deficit. Meanwhile, if exports are higher than imports, it means that there is a trade surplus. The surplus condition will support the strengthening of the currency exchange rate, but the deficit will weaken the currency exchange rate.
In addition to trade balance data, there is also a current account balance. The difference is, demand deposits not only include exports and imports, but also the flow of money into and out of a country such as remittances and foreign investment. However, current account data is released every three or six months, so it doesn't have much impact on the exchange rate.
Those are the seven most influential fundamental news that forex traders need to pay attention to. However, traders should not only focus on these scheduled news publications. Periodic news such as elections, referendums, wars, virus outbreaks, and the like will also change the fundamental assessment of currency exchange rates. Stock market performance, bond yields, as well as the business and investment climate can also encourage the strengthening or weakening of the exchange rate.