Why economic data matters

If you're new to forex trading, you might wonder why experienced traders seem glued to economic calendars and news releases. The reason is simple: currencies represent economies, and economic data tells us how those economies are performing. Think of economic indicators as health check-ups for a country’s economy-they help traders predict which currencies might strengthen or weaken.

Impactful Forex economic indicators: What to watch

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 figures can be major market movers. 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) measures how prices change 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 shows the difference between a country’s exports and imports:

• Trade surplus (more exports than imports) → Strengthens the currency.
• Trade deficit (more imports than exports) → Weakens the currency.

How news events move the market

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 small wording changes in statements can trigger major currency moves!

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

Trading around news events: Practical approaches

Using an economic calendar

• Check it daily.
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• Note the impact level (high, medium, low).
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• 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:

• Stay out of the market during major news events.
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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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• Keep a trading journal noting market reactions to news events.
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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.

Learn more about Forex trading with our free courses on Deriv Academy and practice 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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