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Gold closes week higher on rate cut speculations

News

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Another nice quarter for NVIDIA?

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Learn

Key financial events:
how to read an economic calendar

Disclaimer: This article is an educational guide to CFD trading and the financial markets and should not be considered as advice. Trading CFDs is high risk. Always ensure you understand the potential risks and rewards associated with trading before you trade.

Introduction

Markets are supposed to price in available information, allocating capital efficiently to where it is most effectively used. Not everyone agrees about how well they do this, but one thing that’s certain is that when the information available to the market changes, prices react immediately. Economic announcements are made regularly according to fixed schedules, which vary depending on the market concerned: stocks are obliged to regularly report on their financial performance, while national governments provide provisional data about important economic metrics such as unemployment, inflation, and GDP growth.

Understanding these metrics and using them to trade is the task of fundamental analysts, who along with technical analysts form one wing of the two most important trading approaches, applied to different degrees in all markets. The economic calendar lets traders known when certain figures will be announced, alongside the dates of key central banking decisions like raising and lowering interest rates, and volatility is often heated around these events. Some market participants ‘trade the news’, making predictions about the expected impact of a positive or negative figure, while others avoid these spikes of volatility with hedges or by closing positions. Whether you want to trade around economic announcements or not, you need to know how to work with an economic calendar if you don’t want to be blindsided by sudden market moves.

 

The economic calendar

What is an economic calendar? A simple concept, the economic calendar is a generic term for a collection of key trading dates, which may be more or less thorough depending on the provider. Economic calendars are often customisable, which is helpful, because most traders are not interested in every single economic announcement – interest rates in Norway are unlikely to influence the USD/JPY exchange rate – but some key markets do make an impact worldwide. Chief amongst them is the USA, not just because of the size of its economy, but also due to its status as global reserve currency and use in international trade. Other major economic announcements to watch for include the EU, China, and Japan, and most calendars will include these as part of their overall selection.

Because the economic calendar is not identical everywhere, its useful to understand the different ways it can change. The most obvious is by region: CFD traders in MENA will want to follow key regional economic announcements, such as GDP figures in Egypt and the UAE, while a trader based in Brazil is more likely to follow Brazilian and Argentinian announcements of the same data. Wherever they are, traders are likely to follow the announcements of the largest states or economic blocks: so definitely China and the USA, and usually the EU and Japan too. On top of this key regional economies, and of course the economy of the state where the trader is based, are essential.

 

Variations across markets

Exactly which events you choose will depend on the markets you trade CFDs in. The economic calendar is most keenly followed by forex CFD traders, but they are used across markets. The most important announcements are the same for each of the main asset classes, but a forex financial calendar will typically include the most information, while equities traders are interested in corporate results reporting as much or more than economic statistics. Depending on the stocks held in a portfolio – or underlying stocks traded with CFD contracts – different company announcements will be relevant, but the broader market only follows announcements by the very largest companies. Commodities prices are influenced by the same factors as FX, and sometimes by corporate announcements too, given that some commodities are extracted by a relatively small number of large companies. Additionally, estimates for mine production or agricultural statistics will be hotly anticipated by commodities traders, and markets experience additional volatility around these announcements. Crypto CFD markets are largely uninfluenced by economic announcements.

 

Comparing different market announcements

The most important events on the economic calendar involve either decisions by central banks or the reporting of economic statistics. This is normally closely regulated, and economic analysts closely observe statistics to ensure they are accurate. Certain markets are frequently accused of exaggerating or misreporting economic metrics; in these markets analysts try and find alternative measures to confirm economic performance.

Generally, market announcements are compared to the overall market expectation, which can be seen in derivatives activity. If traders generally expect an announcement to be strong, they will protect short positions, and vice versa for long ones in the case of an expected poor announcement. The actual level of volatility after an announcement depends more on its relationship to expectation than the actual level: if the market expects 2% GDP growth, an unexpected announcement of 0.5% will cause a downward correction. Another economy achieving 0.5% against an expectation of -0.5% will see upwards volatility.

Some key economic indicators

There are a few different economic indicators or financial events you need to understand. Chief among them are Non-Farm Payrolls, GDP growth, and central bank interest rate announcements. These figures and actions have an impact on global markets, especially on the FX market but also elsewhere, with bonds for example very sensitive to interest rate changes. Fundamental traders are interested in the next Fed meeting for obvious reasons, but the volatility caused by interest rate changes mean the below should be taken seriously by anyone active in the equity, forex, or index CFD markets.

 

Non-Farm Payrolls

The non-farm payroll is a monthly survey of over 110,000 US employers confirming how many employees they have on payroll, excluding certain sectors such as agriculture. The NFP captures about 80% of all jobs in the USA, mostly excluding seasonal workers like farmhands, employees in private residences, and certain government employees such as the military. This means after the announcement of the Non-Farm Payroll forex markets often move significantly, as an unexpected strengthening or weakening of the number is an early sign of economic growth or trouble ahead. A significant drop in employment has major knock-on effects as consumers have less money to spend and become more cautious in their financial decision making, so this measure has a strong impact on the US dollar and therefore worldwide markets.

 

GDP growth

Gross Domestic Product (GDP) is a measure intended to include all of the economic activity in a territory over a period, defined as the market value of all finished goods and services. It is often standardised to Purchasing Power Parity (PPP) to account for the different prices of goods across markets. GDP is the main measure of a country’s overall economic importance, and changes to the growth rate of GDP are closely followed by analysts. GDP is always an approximation, and different analysts will calculate the value differently, with considerable political pressure to improve figures sometimes exerted on central banks or bodies responsible for GDP reporting. As with Non-Farm Payrolls, GDP announcements impact the market based on whether they are expected or unexpected, and at least in theory the currency of a nation with higher GDP growth will tend to strengthen relative to one with weaker GDP growth. Short term technical traders should beware though, because many of these fundamental rules have limited applicability to short-term movements, which are far more influenced by technical factors.

 

Fed Open Market Committee (FOMC)

The FOMC has maintained control over US interest rates as an officially sanctioned body within the Federal Reserve since 1933. FOMC board members vote on whether to increase, decrease or maintain interest rates, and the votes of each member are public. Not just rate changes, but changes in position by voters, who are categorised as ‘hawks’ or ‘doves’ based on whether they want to raise or lower rates, are seen as newsworthy market events. This is because a switch in the balance of hawks and doves, even if it doesn’t lead to an immediate rate change, may do so at the next fed meeting or a subsequent one. An unexpected rate change is an enormous financial even that will send shockwaves through various markets; to avoid this, the Federal Reserve try to signal what they are trying to do, but in a sufficiently opaque manner that they still have flexibility to act differently. And so the famous quote by former chair Alan Greenspan: I constantly worry that I might make myself too clear. As well as setting interest rates, FOMC forex trades on its own account – managing the currency reserves of the United States government.

 

Trading the news

Traders can use the economic calendar in a few different ways. The most obvious is just to avoid when financial events that might impact your CFD positions will occur, and close them early – if you know US GDP growth is being announced at 10am, you can close your USD / JPY CFD shortly beforehand. This avoids the random element of volatility that could see you stopped out of positions early.

Another is to trade the news, where you use the calendar to identify trading dates where you will try and profit off of expected volatility. This normally requires having some kind of opinion on the likelihood of a positive or negative announcement, something fundamental traders are comfortable with but that more technically-focused market participants tend to avoid. Even if that is you, it is worth understanding how a news trading strategy might work.

Let’s say you are interested in opening a long EUR / USD position, with a fundamental case since you believe that the Eurozone may experience stronger economic growth relative to the US. You are looking to make a short-term trade, so you open a long CFD position, setting an appropriate stop loss and take profit level, just before the Eurozone GDP announcement as confirmed on your EU economic calendar. Assuming your judgement is correct, the EUR will likely experience an upwards spike, and the position with close successfully. Of course, if the announcement goes the other way, or even shows growth but not enough to ‘surprise’ the market, the volatility may move exchange rates in the opposite direction. This unpredictability is one of the reasons many purely technical traders avoid opening positions before major events in the trading calendar.

 

Risk management about market events

It is all very well to know what an economic calendar is and how to use one. But even if you don’t want to trade the news, knowing how it impacts your risk management practice is essential. As mentioned, the simplest way to reduce the risk from unexpected market announcements is to close positions beforehand. If that’s not an option, think very carefully about stop losses, because sufficient volatility will sometimes cause the price to jump suddenly past stops.

If you have a EUR / USD stop loss at 1.091, and poor Eurozone growth figures cause the rate to jump suddenly down to 1.088 in a single tick, you are looking at a loss in excess of your stop loss. This is a bad situation and would be made worse by significant leverage.

CFD trades are almost all executed on an intraday basis, so there is no real need to expose yourself to market risk during Fed announcements or other dicey periods. That doesn’t mean you need to stay away from markets on the day of an announcement, just that having a position open before it comes in is a riskier way to trade. If that’s your intention, fine, but if not, it may be wiser to trade shortly after the announcement, when there is often an opportunity to trade the correction and counter-corrections which can take place when rates jump too sharply.

 

Conclusion

The economic calendar is a vital tool for fundamental traders, and an important one for technical traders too, unless they want to get caught out by sudden volatility around major announcements. Your economic calendar can be personalised, but it should definitely include the three most important US dates, their Chinese and Eurozone equivalents, the UAE and largest regional markets, and any other currencies you trade. For purely technical traders, closing positions before the time of the announcement is normally a wise strategy, but for those who want to trade the news, there is ample opportunity to trade both long and short positions immediately after the announcement is made.

FAQs

What is a forex financial calendar?

A forex financial calendar is simply another term for a trading calendar, geared towards the needs of FX traders or FX CFD traders. Such a trading calendar will include GDP announcements, possibly imports and exports announcements, interest rate decisions and more. Knowing when these announcements take place will help both news traders and those who simply want to manage the risk of volatility.


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