We learned about some of the major market players that have a tendency to impact prices, and today we are shifting that focus from the ‘who’ to the ‘what.’ In this lesson we look at some of the major market drivers that often bring volatility into FX markets.
FX markets can be somewhat unique due to their 24-hour nature. For many other markets, domestic business hours typically dictate timing of releases, which are broadcast during their trading day. In FX, because there are so many economies around-the-world represented, the market never really closes, and drivers can take place around-the-clock.
The very first thing to become aware of is the economic calendar. It should serve as an outline of the potentially market-moving events that may impact the markets you follow. At DailyFX, we have one of the more popular and, in my humble opinion, attractive economic calendars available. You can navigate to and
After familiarizing yourself with the layout and function of an economic calendar, it is time to focus onlarger items of importance.
Central banks are generally charged with at least one mandate and in the case of some banks, such as the Federal Reserve, two mandates. Most central banks are responsible for keeping inflation in check. The rationale is fairly logical as there would be tumult in an economy if the price of basic necessities were jumping by 10% per year. This would be an ill-suited environment for producing economic growth if people were panic-buying all of the time for fear of uncontrollable inflation.
This means that most central banks watch inflation very carefully in order to proactively adjust policy to prevent it from getting out of control. In the United States, one of the more popular inflation metrics is the Consumer Price Index, as discussed at the link below.
The CPI and Forex: How Does CPI Data Affect Currency Prices?
Depending on how inflation data looks, Central Banks will generally move towards a bias, to some degree. The bias towards possible rate cuts, softer policy and looser economic conditions is referred to as ‘dovish.’ The opposite posture, investigating possible rate hikes and tighter policy is usually considered ‘hawkish.’ These terms are highly important in today’s environment as market participants attempt to deduce how central banks may react to various scenarios presented by the economic data.
Hawkish v/s Dovish: How Monetary Policy Affects FX Trading
Monitoring inflation is very important, for many central banks, such as the European Central Bank, or ECB, this is their primary function. They monitor inflation or potential inflationary forces in order to maintain a stable economy that can allow for economic growth. The onus for growth usually rests with politicians; and that growth is often followed in terms of employment and gross domestic product.
Other central banks, such as the US Federal Reserve, carry a dual mandate to not only monitor and control inflation, but also to support employment. This additional responsibility is important as it serves as a counter-balance to inflation, and central banks with this mandate are often trying to strike a balance between an economy that’s growing fast enough to support full employment, but no so fast to spur egregious levels of inflation that threaten stability.
In the United States, the big data release for employment is the monthly release of non-farm payrolls, or NFP. At DailyFX, this is usually a big deal every month as it’s often a major market mover. To learn more about NFP and how it illustrates employment trends in the US, the link below will take you our walkthrough.
NFP and Forex: What is NFP and How to Trade it?
We’ve covered quite a bit of information in this lesson and the real-world application will put to work some of this knowledge. Navigate to the economic calendar and filter for ‘high-impact’ events for the week. This can be a great opportunity to see the way that data releases can impact FX prices in a fairly unpredictable manner.
With a demo account, you have the ability to put on ‘test’ positions to see the way that they would perform with different backdrops. If time is of issue and you’re not available to set orders during or immediately before one of these events, you can use entry orders to pre-program your setups ahead of time. To learn more about using entry orders, the article below explains details:
Forex Order Types
The thing to remember about data releases is that they’re always going to be unpredictable, and that’s ok. No matter how much you learn or how great your analysis becomes, there’s an element of uncertainty that always exists, and it’s best to get comfortable with uncertainty as early as possible.
