In this latest video we're going to take a look in a bit more depth about what
actually moves the foreign exchange market. So we're gonna look at what
government announcements and news you need to keep an eye on when trading forex.
Hello, I'm David Jones from capital.com and this is the latest part of
our "How to Trade Forex" course. We're now going to start digging into things in a
bit more detail. Next time around we're gonna start on trading strategies, so
make sure you're subscribed to never miss out on that new content but
first of all, let's just spend a bit of time looking at what major announcements
and what sort of news can really move foreign exchange markets during a
typical trading month. Potentially there are lots of different
announcements that can have an impact on the market but month in and out I think
there are some real key ones to keep an eye on. So without further ado let's get
into that. Let's take a look at what actually moves currency pairs around and
as traders what we need to be watching during the week, the key announcements
that we need to keep an eye on. Let's start off with a high level view of
what to watch when it comes to foreign exchange. First of all government
announcements. So for example monthly unemployment numbers can give us an idea
as to how healthy or not an economy is. These tend to be closely watched. Also
announcements from central bank's whether it's the Bank of England, the US
Federal Reserve, the European Central Bank, the Bank of Japan on interest rates
and how they see the economy. These can also play a major part in short and
medium term volatility for foreign exchange markets. Then of course there's
wider news in recent years. We've had Brexit. We've got concerns about trade
wars between the USA and China for example. So these larger economic
factors will also impact various currency exchange rates. And finally
there's market sentiment. We'll look at a couple of examples when we come to the
end of this. But, I mean, just the overall
momentum in a market, you know, can increase the volatility and have markets
overshooting in both directions. So we'll take a look at that. Let's deal with
government announcements. So these are released on a regular schedule
throughout the month, so every month we have for example, unemployment data
inflation data, this sort of thing. And these are really the two I think to
watch + GDP. So GDP is gross domestic product. Is the economy growing, is the
economy shrinking, is there a risk of recession. So for example if we saw, let's
say, the eurozone, some of the major economies there slip into recession, that
could well influence how the central bank reacts. Which has an impact on the
currency. So all these things are tied in together. But these are some of the main
ones to watch. Then we have central bank announcements, interest rate decisions.
We have been in for many years a low interest rate environment, although rates
have been creeping up over the past year, 18 months or so. Particularly when it
comes to the U.S. But typically there will be one announcement a month from a
country's central bank. So even if they don't change the interest rate, they will
often provide commentary around how they see the economy for their particular
area evolving and these sort of statements again can inject volatility
into the various foreign exchange markets. So even if there's no change
expected, it's still a big announcement to watch. In the U.S. it's the Federal
Reserve, for the eurozone it's the European Central Bank, for the UK it's the
Bank of England and in Japan it's the Bank of Japan. So when this announcement
is due to be made, there's normally an expectation about what's going to happen.
So it tends not to be a surprise, the actual announcement but also they will
offer and give guidance and maybe hints as to how they see rates moving in the
future. So more often than not it's their look
or word that's the important part of the announcement, rather than the decision itself.
Let's move on to wider news. This really can be anything that we
think could potentially affect a country's economy and that will have a
knock-on effect for its currency. If an economy is shrinking, then usually
the currency will be falling as well and vice versa. In times when things are
going well, the performance of the currency is often seen as a vote of
confidence in the economy. So what sort of things do we need to keep an eye on?
Well trade rules for example, that's something that has definitely increased in
importance in recent months. So the threat of.. for example the U.S. imposing
tariffs on China's export to America or the export of European cars to the U.S.
So the trade wars here can really have an impact. Brexit of course has been a
big factor for both the pound and the euro for the past two and a half years
now, so it's the the actions of politicians that can really have an impact on
the currency marke(if they think that's going to affect the country's economy).
Political instability if we saw, you know, a lack of confidence in a current
government in one area of the world. That can cause a loss of confidence in that
country's currency. Something maybe less tangible is market sentiment and I think
maybe the best way of illustrating this is to go through some examples because
trends can take on a whole life of their own. Often if a market starts moving
really strongly in one direction it fuels more people to take positions in
the same direction and so it carries on. On the downside, selling sparks off more
selling. If we see a currency, maybe really starting to crash because that
country's economy is in a mess, then as there's more and more selling it
can fuel more aggressive selling, pushing that currency ever lower. Let's look at a
couple of examples. First of all the UK Brexit decision in 2016. So on the day
of the vote the expectation was that the UK would vote to stay in the European Union.
Pound U.S. dollar (GBPUSD) briefly touched 1.50 on the night of the vote, as the
polls closed. But as the evening went on and into the early hours of the morning. It
suddenly looked as if the UK could actually vote to leave the EU and see
what happened next? So there's the move - you can see a
massive turnaround in sentiment, the pound really collapsed overnight and
there was an element of of panic in the market and that brought out more sellers.
So we saw over the course of little more than 24 hours a 1800 point turnaround in
the fortunes of the pound against the US dollar. So trying to go against that
sentiment.. there was just so much pressure on the back of the vote to
leave that it did really fuel more selling and we saw the market pretty
much collapse over a couple of days. Of course markets can get carried away to
the upside as well. A great example of this is the cryptocurrency bubble in 2017.
Let's take a look. It was probably the late summer of 2017 when things
really started to move. We're looking here at a chart of Bitcoin. It was
trading around about 2,800. Let's just jump forward a month. So a month later
the price had increased from 2,800 to about 4,800. So there was ,this is the
thing, when the frenzy was maybe really starting to take hold
amongst the wider public and more and more people moved in to buying Bitcoin
because they thought the price would just carry on moving higher. Let's jump
forwards again. So by mid November 2017 the price of Bitcoin had touched $10,000
so people who'd bought were sitting on open profits, there was lots of press
saying about how high Bitcoin could go. It was gonna change the world and there
really was a frenzy building. Let's jump forward again. By mid-december the price
almost doubled again, so we almost touched 20,000 by mid-december. And here,
this is really market sentiment running away. And the
buying and pushing the price higher, just fueling more buying and bringing in
more buyers. And this shows you just how important market sentiment is. And to
bring ourselves up to date, I think we all know what happened next.
20,000 or just below 20,000 ended up being the all-time high.
And since then the price has sold off and at the time of recording was
trading just below 4,000. So we've seen market sentiment in both
directions here. The fear of missing out driving the price up and the fear of the
price crashing, just bringing out more sellers. It's an extreme example but it
does show how important sentiment is. And just one more recent example - the Turkish
lira crisis in 2018. So there are real concerns about the Turkish economy and
we saw what was effectively a run on the lira in August 2018. So this is U.S.
dollar Turkish lira (USDTRY). When the market chart is going up, that's U.S. dollar
strength. You can see it came into July trading around about 4.45, so
one US dollar was worth four and a half Turkish liras.
But then fear really gripped this market and we saw sellers of Turkish lira and
of course buyers of U.S. dollar. So the price went from 4.6 to
briefly as high above 7.2 in mid-august. Since then the price has
calmed down but you can see just how sentiment can really grip a market and
how fundamentals and normal news flow can be disregarded, as that sentiment
takes hold.So you can see that potentially there's a whole load of
announcements that can move the currency markets but the big ones month in and
out - interest rates announcements from central banks, the U.S. non-farm payrolls
(that's the U.S. unemployment numbers). It's a major announcement, usually on the
first Friday of the month but sometimes gets pushed back to the second Friday.
And then inflation announcements, because that does have an impact
potentially on what central banks are gonna do when it comes to interest rates.
So it's easy to track all this, as we saw in the economic calendar on our website
and you'll see how the markets reacted. But I'd say those are the ones you need
to be aware of, plus of course the broader backdrop, as we've seen in the
last couple of years. Brexit discussions, Brexit negotiations
and the lack of progress has had a real impact on the likes of the pound and the euro.
Next time around, as I said we're going to start looking at trading
strategies, we're going to start exploring the world of technical
analysis and charting. But we'll start wrapping up this latest lesson. Of course
don't forget we also do analysis on various markets throughout the week.
Whether it's the euro, gold, oil, stock market indices, crypto currencies, that
sort of thing. We do live broadcasts direct from our YouTube channel, just
staying on top of what's happening with markets. To find out more about the
company go to the website capital.com. You can open up a demo account and try
out some of the techniques that I talked about here. And of course when you're
ready to start trading it's easy to fund it and start trading with real money.
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and capital.com - good luck with your trading!