Firstly, it’s vitally important to know in advance which economic numbers are due to be published and when. Obviously, there are stacks of releases which vary in importance, but it is still worth knowing when data is due to be published. Keep an eye on the economic calendar: not only will this tell you which data releases are due out from which country, but also what the previous number was and what the consensus expectation is for the latest update. Spread Co’s economic calendar will also show you the relative importance to traders of each event or release.
Here are some key data releases which have the potential to move currencies dramatically, all other things being equal. There are employment reports such as US Non-Farm Payrolls and the Unemployment Rates for other countries, inflation numbers (such as CPI), Retail Sales, Manufacturing and Non-Manufacturing PMIs, Durable Goods, Industrial Production and Gross Domestic Product (GDP). It’s important to know how to use this data effectively. First of all, there is the data release itself. We can quickly establish if this is better or worse than the prior release. Then we need to know how the latest release compares to the consensus market expectation. Then there is the overall trend in the data series. We can look at prior releases to see if this has been improving or deteriorating over time, and how the latest release fits in with the overall trend. It could be that an unexpected number triggers a sharp initial reaction which unwinds quickly if traders decide that it is a “one off” or outlier which may be due to specific circumstances. There’s always the possibility that the market can move violently as a response to a particular release. For this reason, many traders prefer to avoid trading around important economic numbers.
It’s vital to remember that currencies trade in pairs, that is, you’re looking at how one currency fares in relation to another. So when you look at FX fundamentals you’re typically comparing the trend in the economic data of one country with another.
On top of this international trade flows can also influence supply and demand for a currency. Countries with a positive trade balance, that is ones that export more than they import, can see the demand for their currency increase. This is because foreign buyers have to exchange more of their own currency for the currency of the exporting country. This increases the demand for the currency and puts upside pressure on it. Typically, this in turn is deflationary for the exporting country as its stronger currency means that its imports cost less.