Fundamental factors that affect the currency markets in the short term

Each forex trader, whether he uses technical analysis or fundamental analysis more, must take into account and acknowledge the importance of economic data.

For example, even purely technical traders who don't take into account fundamental indicators, generally leave the market shortly before the publication of important economic news.

Many traders deactivate their trading systems before the publication of relevant economic indicators such as the US non-farm payroll (NFP) reports.

However, there are also technical traders that take fundamental indicators into account in their trading strategies and await the announcement of important economic indicators in order to take advantage of the strong price movements they tend to provoke.

For this reason, it is extremely important that you become familiar with the most relevant economic indicators for the US dollar, as well as those of other currencies such as the euro or the yen. Since 90% of foreign currency transactions include the US dollar, it makes sense that the forex is sensitive to news involving this currency.

According to a study by renowned trader Kathy Lien, the largest movements of the dollar in 2004 occurred after the announcement of economic news, within the 20 minutes following the publication of this news. As the following table shows, the NFP is without a doubt the most important economic data report in the United States. On average, during that year, the EUR/USD rate moved by approximately 124 pips in the 20 minutes following the release of the economic data report. If we exclude data reports that were less than 10% away from the estimated figure, the average move was 133 pips. On the daily chart, the EUR/USD moved on average between 193 and 208 pips. During a typical trading session, EUR/USD experienced a price change of 111 pips.

Conversely, when the GDP was announced, the average movement during the first 20 minutes was only 43 pips with an average of 110 pips per day. As the below table shows, the economic data that generates the biggest USD movements during the first 20 minutes isn't necessarily the same for the entire day.

20 first minutes after the report is announced	Average range (in pips)	Daily range	Average range (in pips)
Non-farm payroll (NFP)	124	Non-farm payroll (NFP)	193
FOMC decisions	74	FOMC decisions	140
Trade balance	64	TIC information (Treasury International Capital)	132
Inflation (IPC)	44	Trade balance	129
Retail sales	43	Current account	127
GDP	43	Durable goods	126
Current account	43	Retail sales	125
Durable goods	39	Inflation (IPC)	123
TIC information (Treasury International Capital)	33	GDP	110

 

Based on the same study by Kathy Lien, the following list was obtained with the indicators that produced the largest changes in the US dollar in 2004:

Key economic indicators that impacted the dollar during the first 20 minutes after the announcement

• Non-agricultural employment (NFP)
• Interest rates (FOMC interest rate decisions)
• Trade balance
• Inflation (consumer price index)
• Retail sales
• Gross domestic product (GDP)
• Current account
• Durable goods
• Foreign purchases of US Treasury securities.

Key indicators that impacted the dollar throughout the day of trading

• Non-agricultural employment (NFP)
• Interest rates (FOMC interest rate decisions)
• Foreign purchases of US Treasury securities
• Trade balance
• Current account
• Durable goods
• Retail sales
• Inflation (consumer price index)
• Gross domestic product (GDP)

In this example, you can compare the average price ranges for the EUR/USD currency pair shown in the above table with the average range for the EUR/USD price movements in 2004, which was around 110 pips.

Of course, the observations and conclusions drawn from this list of indicators cannot be applied to current market conditions, as this is data from nearly 16 years ago, but most of the above-mentioned indicators still have great relevance in today's forex market.

How can a trader benefit from all this?

For traders who trade market breaks, knowing which data has the potential to produce the greatest movement range can be helpful in determining how to enter the market.

A breakout trader will carefully overweight his positions before the publication of data on non-agricultural jobs (NFP report) in the United States in the hope that there will be a significant move and therefore the crossing of support or resistance levels. On the contrary, before the publication of the report on the US GDP, that very same trader will have less anticipation and will evaluate his positions with less attention, because he will not expect a particularly strong price movement.

In fact, on the days when GDP data is published, the average evolution of market prices in the first 20 minutes is only a third of that generated by the publication of NFP data. For this reason, on the day that NFP data is published, cautious traders should reduce the size of their positions to limit their risk.

It is key that you know which economic indicators will produce the biggest moves on the market. It is also very important to understand the differences between daily price moves and the moves generated during the first 20 to 30 minutes after an announcement, because the variations in exchange rates caused by economic news can be very rapid. Any reaction produced during the first 15 to 30 minutes after the publication of economic data can be the result of an exaggerated reaction by traders or a very high volume of trades linked to the flow of clients rather than a product of the news itself. A perfect example is the case of GDP which (in 2004) was subject to a greater price move during the first 20 minutes following the news compared to the overall price move over the whole day.

Another important point is to keep abreast of the information that the market deems most important at a given time, as its direction can change from year to year. Therefore, data that was previously relevant might end up having a less significant impact later on the value of currencies, or on the contrary, economic data that is now irrelevant, may in the future have greater significance for the market.

Relative relevance of the evolution of data across time

Because forex is a dynamic market, one element that traders must take into account is that the relative importance of economic indicators varies over time. For example, in 1992, the trade balance was the main economic data and the driving force of the market in the United States during the first 20 minutes of a daily session, while non-agricultural employment (NFP) and unemployment ranked third. In 1999, unemployment ranked first, while the trade balance fell to fourth place.

In 2004, the trade balance increased again, reaching third place. In that same year, inflation reports ranked fourth, while in 1997 they were the most relevant economic indicator. Non-agricultural employment was the indicator to which the markets paid the most attention in 2004 and, even today, it is an economic figure that has a strong impact on all markets. Logic and intuition tell us that this makes sense since the market focuses on different data and economic sectors depending on the conditions of the country's economy: for example, for a country with unsustainable deficits, the trade balances may be more relevant, while for an economy that has problems generating jobs, unemployment data may be the most important.

The following table presents a ranking of economic indicators according to their level of importance for the market in both 1992 and 1997:

1992	1997
Unemployment	Trade balance
Interest rate	Interest rate
Inflation	Unemployment
Trade balance	Inflation
Gross domestic product (GDP)	Gross domestic product (GDP)

 

Of course, this information is somewhat outdated, but it clearly shows that the importance of an indicator can change over time.