Forex fundamentals
Part two of two, exploring the key metrics for forex analysis (Read Part 1 here)
Consumer price Index (CPI)
This is a gauge for inflation and is released monthly together with CPI Ex Food & Energy. Food and energy are considered essential and demand is less elastic than it is for other goods, therefore CPI Ex Food & Energy is thought to better asses the economic activity through price change. A higher than expected number will mean that consumers are buying more and pushing prices up more than was expected. This is bullish for the economy and of course also for the currency of that economy.
GDP growth
This data is released only every 3 months. But it is important data to understand the overall trend of a currency. An expanding economy that has seen a consistently higher growth rate than the economy of another should see its currency appreciate against the slower growth currency. For example the USA has had around 2.5% GDP growth for the past 2 years, while Europe has had positive growth – but only around 0.5% Looking at a chart of this currency pair we will see that overall the Euro has depreciated and the USD appreciated. Usually this data does not bring any surprises but when it does it can seriously affect the price of USD. Here a higher than expected number will also push the USD higher.
Initial Jobless claims & Continuing Jobless claims
This is one of the few data sets that is released weekly – every Thursday – and therefore will have less impact than monthly numbers. But it is worth watching as there will be surprises, and if the difference is big enough there will be sharp changes in price. Initial jobless claims is the number of unemployed filing for the first time, whereas the Continuing data refers to the ongoing number of unemployed receiving benefits. These two numbers sometimes contrast, i.e. a large drop in initial claims yet an increase in continuing claims, which usually means there will be no reaction. If both show larger than expected increases then this indicates a contraction in the economy and is bearish for the affected currency.
Capacity Utilisation & Industrial Production
This data is also released monthly, Industrial Production is easy to understand; the more goods being produced the more the economy is expanding and therefore higher than expected numbers are bullish for the economy. Capacity Utilisation measures how much of the industrial production capability is being used, a higher than expected number is bullish for the economy and for the relevant currency. It is also possible that at times these numbers released will be contradicting, one higher and one lower. It will depend mostly on how great these differences are, and from the expected number, that will determine how price reacts.
FOMC (Federal Open Market Committee)
The Federal Reserve acts as the central bank of the USA and holds meetings 8 times a year to decide on monetary policy, which also includes Interest rate increases or decreases. All nations have a central bank and each one holds meetings, more or less monthly, to decide on monetary policy. Usually there are not many surprises, but what can move the market is what is said by the Federal Reserve (FED) Governor as to what will happen in the near future and how the FED sees current economic activity. FOMC meetings are held on a Wednesday and there is a press conference at 7pm GMT.
The ECB also holds meetings almost monthly on the first Thursday of the month and the press release is at 01.30pm London Time. The Bank of England usually holds its meeting on the same day but the press release is at 12.45pm London Time. What is crucial here is having access to live commentary, either direct access to the speech through a TV channel or through a website, if not it’s best to sit on the sidelines for the first hour or so.
General forex fundamental concepts – It is important to understand the basic concepts of macro-economics and how they reflect on a currency, but it is also important to understand the general economic scenario. Currently interest rates are at an all-time low in Europe and the US. As mentioned above, increasing interest rates will favour that currency over another that has stable interest rates. But this concept changes if inflation sets in. In a scenario where one country has higher inflation, even though it also has higher interest rates, you will see this currency depreciate against a currency of a country with lower inflation, and lower interest rates. You will also see that sometimes even though there has been an unexpected number released the market does not react as one would have expected. This is part of Forex and financial markets behaviour in general, if the forecasters got the level wrong then we fail to see if the number is really unexpected or if so by how much.