Forex and the economy: links of the same chain

The connection between economic condition and stock movements at the global markets is obvious. Most market ups and downs – be it stock, currency rates or other assets – are caused either by actual performance figures and statistics or by forecasts regarding economic situation in one industry or another. Only professionals can predict reactions to specific news or events – and not necessarily with 100% precision, but anyone into Forex trading or other market activities should be able to consider the effects of economic situation.

Trading is not just technical analysis

Some Forex traders and even brokers claim one doesn’t need to have knowledge of economic situation to become a successful trader – all the information on upcoming prices is right there in the charts, they say. With some smart technical analysis one can predict the outcome of a deal without going deep into the basics.

This approach to the market is radically wrong, and regular market crashes are the best proof of that – it would be unwise to deny their colossal impact on the markets. Nor is there any possibility to predict a crisis with technical analysis instruments.

Another example of the economy affecting the markets is the oil prices in 2015-2016. Neither candlestick analysis nor any other indicators predicted the crash – but the economy didn’t care about technical analysis and oil is only worth as much as the buyers are ready to pay for it at this given moment in time.

However, as you might have guessed, economic conditions are never alone: the economy usually comes hand-in-hand with politics. Important political events cause changes (or expectations of changes) in the economy – so they also qualify as market drivers.

What makes Forex and other markets tick

To begin with, we have to say there are certain industry economic indicators, which in most cases affect a certain set of financial assets. For example, data on cotton yield and demand for this commodity are not likely to affect the exchange rate between Australian and US dollar. However, this information will be vital for those trading in cotton futures or textile industry shares.

The situation is similar in the stock market, where each paper belongs to one industry or another, and you’d better learn something about the respective industries before opening a position (particularly a long-term one). On the other hand, big success of an individual company can raise stock prices throughout the respective industry, even if the sector is not doing very well.

Those who do Forex trading also know about the existence of economic conditions which are important only for specific currency pairs – this is particularly important for “cross currencies”. For example, the exchange rate between New Zealand and Australian dollar is affected by a host of factors which will not move the pound-to-euro exchange rate even a little bit.

There are also economic factors that will put every significant market in motion, with no exception. Global political and economic crises, growth or drop in prices of essential resources, emergence of new technologies, wars or changes of power in some countries – all of these make millions of stock tickers go frantic, increasing volatility and therefore the chance of getting more profit.

Watch the news!

News are the main source of information on the economic conditions for Forex and other asset traders. Which news are noteworthy to you depends on what exactly you are trading in. One thing to keep in mind: even if you are trading in European or, say, Asian stocks, major economic updates from the US are still likely to set your instruments in motion.

The thing is, trading volumes in the US markets are much higher than in any other country. Moreover, large institutional traders dealing in, for example, European stock, generally hedge their positions with US futures and options. Forex market is particularly closely tied to the US dollar. Moreover, there are numerous correlations between the markets in the United States and other countries.

So don’t get surprised when US monthly employment updates – so-called ‘payrolls’ – change the status of assets not seemingly related to the numbers of unemployed Americans. Decisions of the Federal Reserve System and even statements made by individual members of this organization have a huge impact on the entire world. As for political events – just open the history of any instrument in your trading terminal and watch volatility increase every time there are presidential elections in the USA.

It is also important to remember: knowledge of economic situation, unfortunately, does not help one to predict the market situation in every detail. Often quotes do not exactly agree with the economics. For example, an industry may be on the rise – but a company’s shares will still be falling as owners would like to sell them at good prices. On the other hand, trading entirely without considering economic factors is like playing darts blindfolded; knowledge of economic basis will definitely help you avoid serious mistakes and increase the share of profitable deals.

RISK WARNING: Trading of complex financial products, such as Stocks, Futures, Foreign Exchange ("Forex"), Contracts for Difference ("CFDs"), Indices, Options, or other financial derivatives, on "margin" carries a high level of risk, and may not be suitable for all investors. The possibility exists that you could sustain a loss of some or all of your initial investment and, therefore, you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading these markets, and seek advice from an independent financial advisor if you have any questions or doubts. Please carefully read our full "Risk Disclosure" and "Risk Disclosures for Financial Instruments & Investment Services". FXFINPRO Capital is the trading name of PFX Financial Professionals Limited, a limited liability company formed under the laws of Cyprus, registered with the Registrar of Companies in Nicosia, Cyprus, under nr. HE 237840 and regulated by the Cyprus Securities and Exchange Commission with license number 193/13.