Global Politics

“The political decision of a country plays an important role in determining what happens to its currency”
Forex Trading is fast becoming one of the largest sources of income to online users- no matter their location. However, many always complain of loss, due to their inexperience and their inability to predict the Forex market. This prediction cannot be very accurate; but understanding the various events that directly affects the Forex market plays a major role in avoiding loss. In Forex trading, geopolitical and macroeconomic events are considered as the two most powerful forces affecting market movement. The political events in a country have a great effect on the economic outlook for that country and, consequently, the perceived value of its currency. Elections and crisis in a country are considered some of the biggest political events that affect the economy of a country directly. This happens because, exchange rates often favours parties who have a strong financial policy as well as governments who show willingness for economic growth. A good example is the Brexit. The aftermath of the Brexit had a major impact on the British pound (GBP) when the UK voted to leave the EU. Sterling reached a record low, something that was last witnessed in 1985 after the vote because, the economic prospect of the UK, suddenly became gloomy and uncertain. A similar thing happened in the US, when US President, Donald Trump emerged as the winner of the US election. Another example is the aftermath of the US invasion of Iraq in 2003. From the onset, many thought that the United States would have controlling interest in Iraqi’s wealth (oil!). Because of this, the dollar rose dramatically. It perceived that the war would end quickly and the US would gain all that wealth. However, the US Dollar levelled up again when it became clear that this was not going to be the case.

Central Bank Rate Decision

“The decision reached by the apex bank of a country shows the economic health of such country, thereby affecting its currency strength.”

The apex bank of every economy in the world, meets each month to decide on the interest rate of the economy they are responsible for. One of the key decisions they make during this period is if they want to leave the exchange rate unchanged, lower or raise the rate.

This decision is paramount in determining the currency of the economy and as such, to traders. If the central bank decides to increase the rate, it also affects the value of the currency and a decrease means a lower value of the currency. On the other hand, if it decides to leave it unchanged, it can either have a negative or positive value depending on the perception of the economy.

For instance, in January 2015, the Bank of England (BoE) decided not to raise its interest rates. This decision, raised concern over the country’s economic health. As a result it made the Sterling less attractive in the currency markets.

In January the same year, the European Central Bank (ECB) decided to implement a Quantitative Easing (QE) program at the rate of €60 bn per month that lasted until September 2016. The decision which stated some conditions for countries under bailout like Greece, and Portugal, also forced forex traders to view euro with less confidence then.  Despite having a big hit earlier, following the Swiss National Bank’s decision to unpeg its currency from that of the Eurozone, the decision sent the Euro spiralling to new lows in the currency markets.

cpi inflation data

CPI (Inflation Data)

“The CPI of a country no matter how small they are, always have a ripple effect on the value of currencies involved.”

Over the years, Forex traders have devoted much of their time to closely monitor inflation through the Consumer Price Index, which also serves as a fundamental economic indicator. The CPI index gives details about the historical average prices that consumers paid a basket of market goods and shows if consumers are paying higher or lesser for the same goods.

The fact that inflation tends to result in a low purchasing power of money in an economy, the apex bank of many economies, control it by typically raising interest rates to combat higher inflation, and lowering interest rates in deflationary situations.

Economic experts usually use the CPI level to assess the level of inflation prevailing in a country’s economy, that relates to the cost of goods and services to a typical consumer.

In most cases, the CPI data is often used by experts to compute cost of living, increase in wages; and determine a suitable price increase for goods and contracts by businesses.

For Forex traders, the CPI is very important since it can influence a nation’s monetary policy, especially when it deviates from its normal values.

For instance, the Canadian CPI in November 2014, beat market expectations of 2.2% and came in at 2.3%, subsequently affecting the Canadian Dollar to trade up to a six year high against the Japanese Yen.

In other words, if the CPI of a country comes out above the market’s expectations, it will likely increase the value of that country’s currency. However, if there is a decrease or it comes below the market’s expectations, it will also affect the value of that country’s currency.

Additionally, if there is any deviation in the most recent number from expectations that leads to Forex market volatility, a revision of the previous numbers can also have a significant market impact.

The Gross Domestic Product

“The rise and fall of a country’s GDP directly affects how its currency behaves in the Forex market.”

The fourth event that a Forex trader should watch out for is the Gross Domestic Product, as it is an important economic indicator in the economic health of a country. The Central Bank of every country, always have expectation in the level to which it expects the county’s economy to grow each year, which is measured by the GDP.

The Central Bank uses three ways known as the product (or output) approach, expenditure approach and the income approach, which should theoretically yield similar results to determine the GPD.

If the GPD of a country rises, there will be an expansion of business, as companies will hire more staff to keep up with the growing demand for products and services. The country will often witness more exportation, which in turn will improve the country’s business cycle.

If the GDP of a country falls below what it is expected, it affects the value of the currency negatively. On the other hand, if the GDP shows indication of growth beyond what is expected, it also increases the currency value. As a currency trader, you should keenly observe these figures, which you can use to anticipate Central Bank’s movements.

An example was in November 2014, when the GDP of Japan shrunk to about 1.6%, the Japanese yen also lost some value against the US Dollar while anxiously waiting for more intervention from the Central Bank. Similarly, in July 2014, the US economy shrank by 2.1%. This in turn affected the Dollar rate, which traded at a much lower rate than the Sterling.

FOMC Meeting

“FOMC decision affects the strength of other currencies, as the US Dollar is currently the world’s currency reserve.”

Though the central banks of all of the world’s economies have their meetings, the one that is extremely important and has a direct impact on the currency of other countries is the American Federal Open Market Committee meeting. This is because the US Dollar is currently the world’s reserve currency.

The committee meets every month to set the rates and make pronouncement on current economic conditions. It also lets the public know how effective the current monetary policy is, at the same time, keeping focus on what to expect in the future from the economy and its monetary policies.

The committee is made up of two categories of members- the “Hawkish” (those who vote in favour of higher rates) and the “Dovish” (those who vote in favour of lower rates).

Traders always watch out for the statement the committee releases, keenly searching for clues and predicting future behaviour of the Central Bank.

For instance, the FOMC meetings caused huge market volatility as seen on March 18th, 2015 when EUR/USD hiked 400 pips in a matter of minutes, as markets perceived the meeting to be USD negative.

The CBN meeting always discloses any change in monetary policy, such as the announcement of quantitative easing. These decisions are always very important to the Forex trader.

For instance, the ECB in Jan 22nd, 2015, announced their latest QE program which led to the EUR to USD fall by over 600 pips. Keeping in mind that these decisions and announcement help a trader to stay on track and easily predict the market volatility of each currency following such announcements.

Unemployment Rate

“The number of people engaged in the labour market affects how investors perceive a country’s economy.”

The importance of the unemployment rate in a country cannot be overlooked, as the Central Bank of every country uses it to determine how healthy an economy is. Unemployment rate measures how many people in the labour force are currently engaged in the labour force and how many are actively seeking jobs. If there is a high rate of employment in a country, it will lead to a rise in interest rate because the Apex bank targets balancing growth and inflation, and the figure on the other hand, attracts large attention from traders in the markets.

Similarly, the employment rate of a country determines the strength of its currency because, when a low unemployment rate is recorded, foreign investors are led to believe that the economy of that country is healthy. In other words, they may seek investment opportunities in that country, causing a rise in the value of that currency. Contrarily, investors can interpret a rise in unemployment as a weakening economy, which will cause them to seek opportunities elsewhere and so the currency may depreciate.

In another context, an increase in unemployment leads to low consumer spending, because people who currently do not have a job, have little money to spend on unnecessary items. Those still employed worry for the future and also tend to reduce spending and save more of their income.

The Central Bank may likely delay a possible increase in interest rate if the unemployment in such country rises.  For example, in the summer of 2011, some analysts expected an increase in UK interest. However, due to a succession of poor economic data the ECB pushed it back to 2012.

In addition to the unemployment rate, the two most important labour statistics are the US ADP and NFP figures, which are released each month. As a result of the huge attention the market attracts, in relation to the likely date of a hike in the Federal rate, the increase in the figure also serves as an important monitoring point each month.