News has a huge effect on the forex market, and quite often, traders are advised to keep off trading during periods of high-impact news.
Unexpected news that deviates from market forecasts can send ripples through the forex market, increasing volatility and liquidity.
As much as it’s frowned upon to trade during periods when there’s expected to be a high-impact news release, is there a way to still trade and be profitable?
Well, in this write-up, we are going to delve into all the intricacies of economic indicators and news reports.
Classification of Economic Indicators and News Reports
You may be wondering why we are using the terms economic indicators and news reports interchangeably, and that’s because economic indicators are mostly associated with important statistics about an economic activity.
By visiting the forex factory, you’ll be able to get a glimpse of the various news reports, which are often ranked according to their impact levels.
Low-impact news is marked with yellow, medium-impact reports are marked with orange, and high-impact reports are marked with red flags.
The 5 Top News Reports in the Forex Market
Now that we have familiarized ourselves with the various classifications of news reports and economic indicators, let’s explore the five common news reports in the forex market.
1. Gross Domestic Product
Known as the broadest market indicator of any country, GDP includes the aggregate market value of services and finished goods that are produced within a country’s borders.
It’s worth noting that the GDP reports come in three stages, which are the preliminary, advanced, and final reports.
The advanced report, which is the first news report to hit the newsrooms, is the one that tends to have the largest impact on the forex market.
2. Labor Market Statistics
Labor market statistics and job creation reveal a lot about the general performance of an economy, which is why economists and policymakers pay keen attention to the unemployment rates.
To show how much importance is placed on labor market statistics, economic giants like Japan, the United Kingdom, and the United States spend upwards of 70% of their total gross domestic product.
A market where there’s very little unemployment can lead to an increase in consumer spending, which in turn increases economic growth. With the dollar being the global trading currency, it’s no wonder that the NFP (nonfarm payrolls) has a major impact on almost 80% of all the currency pairs.
For those not familiar with the term NFP, it mostly relates to all new jobs that have been created in the economy, including government jobs and farm work.
The non-farm payroll provides an excellent overview of how recruiters for large corporations perceive present and future market conditions. Normally, when hiring managers expect a surge in the number of their projects, they tend to hire more.
3. Inflation Rates
Similar to the NFP and the GDP reports, the inflation rates have a huge impact on the forex market.
In developed countries, central banks have an inflation target that they must meet and adhere to, and they will often monitor and tweak their fiscal and monetary policies to meet these requirements.
To prevent or avoid adverse economic conditions, many countries strive to have a positive inflation rate of about 3% because they consider it beneficial for their economies. There must be a balance achieved because, just as high inflation rates adversely affect the economic activities of a country, having negative rates of inflation can also have an adverse effect on the economic performance of many countries.
4. Retail Sales
The retail sales report is one of the leading and arguably the most important economic indicators that’s available to FX traders. The report is published by the Department of Commerce in the US two weeks after the record month ends, measuring the total number of sales in the retail market.
As earlier stated, consumer consumption makes up a huge portion of a country’s GDP, and retail sales provide excellent insight into consumption at the retail level.
5. Central Bank Meetings
As a forex trader, it’s vital to keep tabs on central bank meetings for potential changes in monetary policies.
In this category, traders keep their eyes peeled for the FOMC, which stands for the Federal Open Market Committee, which stems from the Federal Reserve and oversees the monetary politics in the US.
The FOMC executes open market operations that amend the supply of available money through the selling and buying of government bonds.
Final Remarks: The Top 5 Economic Indicators Every Forex Trader Should Know
If you’ve made it through to this point, then it’s evident that news reports and economic indicators often have the tendency of affecting the exchange rate immediately after they have been released, and it’s not unheard of the markets moving a couple hundred pips, mostly when the released number largely deviates from the expected forecast.
For scalpers and short-term traders, economic news sounds like an invitation to an open buffet, because they can try and ride the waves caused by the volatile market, provided they are on the right side of the market.
Otherwise, it can turn into a teary ordeal when the volatility cleans up your account balance.
