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U.S. Economic Data to Consider when Trading Currencies

As the world’s largest economy, the United States sits in the driving seat of global economic strength. A saying goes that if the United States economy sneezes, the global economy catches a cold.

In Forex trading the United States economic influence is staggering. A closer look at the Forex dashboard reveals everything depends on the U.S. Dollar.

Hence the driving factors behind the U.S. Dollar’s moves hold the key to successful trading. Or, at least to the fundamental part of any trading analysis.

The U.S. Dollar as the world’s reserve currency plays a crucial role in the current financial system. Because other countries use the dollar when pilling up on their foreign reserves, the United States benefits from it.

History showed us that the more people/countries use a currency, the more benefits it brings to its issuer. To this day, many economists argue that the United States benefits from the dollar’s role in the financial system.

Because of the dollar’s importance, the central bank that sets the interest rate level on it is the most important one in the world. For this reason, some call the Federal Reserve of the United States, or the Fed, the world’s central bank.

It may not be the case, but for sure it is the most influential one. When setting the rates and the monetary policy on the dollar, the Fed looks both at internal and international conditions.

Yet, its mandate given by the Government and Senate is to look over inflation and job creation. Therefore, an internal task to set the interest rate on the U.S. currency.

But things are more complicated, and Forex trading isn’t that easy. While the internal state of the U.S. economy, with inflation levels and jobs creation, do matter, the dollar won’t move in a straight line.

If it did, everyone would know the interpretation and the next swing. Or, anyone would make money, which we know is not the case only by looking at the higher number of retail traders that lose their first deposit.

However, traders do focus on the U.S. economic data as it gives a general idea about the future value of the dollar. We already explained in previous topics of this Trading Academy, the relationship between the interest rate and the value of a currency.

U.S. Economic Data That Matters in Forex Trading

We won’t discuss the interest rate level here. The changes in interest rate and the general monetary policy come because of interpreting economic data.

The Fed, like any trader, interprets the economic data for the previous period and sets the monetary policy course for the period ahead. Because the Fed meets every six weeks, that’s the length or the time-horizon of an “economic check.”

Inflation and the Dollar’s Value

Inflation sits on top of the list. Both traders and the Fed closely monitor inflation.

The changes in prices tell a lot about the future interest rate levels. For example, as inflation was close to zero for years, the Fed kept the rates depressed to zero levels too.

Now that inflation picked up, the Fed started a tightening process (raising the interest rates) and will re-evaluate the situation when inflation reaches the target (below or close to two percent).

The catch here is for the Fed not to fell behind the curve. When inflation rises rapidly, and the Fed doesn’t tighten fast enough, a spiraling effect may lead to prices galloping higher and the dollar to lose value, despite higher interest rate levels.

As you can see, there’s a thin line between what normal inflation is and how higher it can go before the money losses its valuation.

Inflation or the Consumer Price Index drives the dollar higher or lower, as traders anticipate the next Fed’s move. For more about inflation in Forex trading, please check the previous article.

Unemployment Rate and Jobs Creation

Besides inflation, jobs are part of the Fed’s mandate. Therefore, any jobs related data is subject to trader’s interpretation and speculation.

Non-Farm Payrolls (NFP)

The NFP shows the number of jobs created in the U.S. economy, except the agricultural ones. It comes out every first Friday of the month, and typically the market trades in a range for the entire week until the number is released.

A higher NFP number leads to a higher dollar. At least that’s the standard interpretation and the first market’s reaction.

However, the real direction depends on many other factors. First, together with the actual NFP number, sometimes revisions of previous releases come out. They have the power to overcome the current release and to reverse the initial reaction.

Second, because the NFP comes on a Friday, end of week trading and positioning influence levels too. Some traders can’t hold positions over the weekend, so they’ll close the trades, hence influencing the Friday’s price action.

Finally, details in the jobs data may confirm or not, a strong NFP number. The Average Hourly Earnings (AHE), the Unemployment Rate, and the Labor Participation rate, all belong to the same set of jobs data that move the dollar.

ADP and the Jobless Claims

The ADP shows the number of jobs created/lost in the private sector. It comes out on the Wednesday before the NFP, and many believe it is more relevant for the shape of the U.S. economy.

Most of the times the ADP and NFP show the same thing, but they can differ too. For this reason, traders use correlation charts to project the future NFP number based on the already known ADP.

The Initial Jobless Claims and the Continuing Claims show the weekly change in the number of people applying for unemployment benefits. The bigger, the worse the NFP, the economy, the interest rates, and eventually, for the dollar.

ISM Manufacturing and Non-Manufacturing

ISM stands for the Institute for Supply Management, and the releases are one of the two most looked-after by traders. The two are surveys that show the state of an economic sector.

The interpretation revolves around the fifty level: higher values than fifty show an expanding sector, while below the fifty level, the sector contracts. They represent an early sign of economic expansion or recession, and that’s why traders care.

Because the United States economy is a service-based one, the ISM Non-Manufacturing (services) release matters more for the Fed in interpreting the economic outlook. Hence, the release tends to be more volatile than the manufacturing one.

Other Economic Data to Consider

Besides the data mentioned above, other economic releases come to complement the financial picture. While not so important, they contribute to the overall market volatility, and deviations from the forecast lead to sharp and aggressive moves in the U.S. dollar.

Such data refers to the:

  • GDP – Gross Domestic Product – shows the total value of goods and services in an economy
  • Retail Sales – shows the health of the consumer
  • Housing data – existing and pending home sales, building permits, etc., show the state of the housing sector, an important one for every economy

Conclusion

The data mentioned here belongs to the tier-one category, meaning it matters in Forex trading and the overall U.S. dollar’s interpretation. But other economic data comes to complete the economic puzzle too.

It is important for traders to know that significant Forex trading swings appear and what releases cause them. The economic data is an integrant part of the fundamental analysis, and together with the technical picture, the two give traders bullish or bearish reasons to trade.