As a forex trader, you’ll need to understand what factors drive market prices so that you can make the right financial decisions. In today’s world, forex has blown up into a global marketplace with buyers and sellers from all corners of the world investing in trades that total up to trillions of dollars each and every day. With such a wide range of market participants all over the world, the effect of microeconomic and news events has increased and now plays a large part in the prices you see for different currencies on the forex marketplace. Some of these events don’t have much of an impact on the market, while others play a major role in market prices. Below, we will explain the role of microeconomics in the forex market and review the different economic factors to look out for.
Here’s a quick overview of the subjects we will cover in this article:
- Interest Rates
- Inflation Rates
- GDP Growth Rates
- Unemployment Rates
- Retail Sales
- Housing Data
- Political News
Interest rates have to do with the amount someone must pay to borrow someone else’s money and these prices have an immediate effect on financial markets. In this case, interest rates are related to central banks that need to borrow funds from the Federal Reserve. The federal funds rate, which directly affects the stock market, is adjusted by the Federal Reserve to control inflation. Higher interest rates generally have a negative effect on stock prices, while lower rates have the opposite effect. This is because it costs more money for central banks to borrow money from the Federal Reserve when interest rates are high, causing a ripple effect that goes through the entire economy.
The inflation rate for the economy is measured by the Consumer Price Index (CPI). While you don’t have to have a deep understanding of the factors that drive inflation rates, it’s a good idea to have some knowledge about how this works. The Index reports the average prices consumers are paying for certain goods in order to point out whether those same goods are costing customers more or less. Central banks then look at this data to help adjust their policies. In the event that inflation is present, interest rates will rise to counter the inflated prices.
GDP Growth Rates
GDP stands for Gross Domestic Product and it is used to estimate an economy’s overall health. A higher GDP growth rate indicates a stronger economy and therefore makes the currency stronger. In order to measure this rate, the most recent quarter of the economy’s performance is compared against the previous quarter’s performance. You can perform a quick search engine search for the current GDP rate in any given country if you’re looking for that information.
Central banks consider unemployment rates to be a good measurement of the health of an economy, therefore, higher unemployment rates cause banks to increase interest rates in order to balance inflation rates with growth. Labor statistics that are released from the NFP also play a primary role in the central bank’s view of the economy based on employment.
Retail sales are considered to be a good indicator of the GDP rate for an economy because people tend to spend more money when they feel that their jobs are safe. Central banks eye spending reports that are released monthly in order to have an idea of how the economy is performing, however, there are other factors that must be considered, like wage increases, which can also lead to an increase in spending.
Central banks pay attention to housing data because the sector makes up around 15% to 18% of a country’s economy. Although the exact percentage can vary slightly, the figures are usually quite impactful. When the price of houses in a certain country go up, it is a sign that the economy is strong and the building of new homes can also help raise unemployment rates. If people aren’t buying houses and prices are dropping, it’s a sign that the economy isn’t performing well.
Different types of political news play an important role in market prices, from government spending, regulation shifts, elections, and referendums. Generally, central banks pay the most attention to fiscal and monetary policies in order to make government influenced decisions that could affect interest rates.