WHAT MAKES THE FOREX PRICES MOVE - Lesson 3

In this lesson you will learn:

• Who are the Influencers of the Price Movement
• What is and the importance of the Economic Calendar
• Who are the Major Participants in the Forex Market

There are many reasons for currency values to constantly vary, without a doubt the events listed on the readily available economic calendars, which are provided free of charge by most reputable forex brokers, will prove to be the major influencers on the price of currencies and currency pairs.

It is essential that novice traders familiarize themselves with the economic calendar and stay ahead of the releases, ensuring that they're continually aware of the next day's and week's events. This type of analysis would be termed "fundamental analysis" and is considered to be the key factor for movement in our forex markets.

These economic calendars will break down the news events into various categories; low, medium and high impact events. The lowest impact category should (in theory) have the least impact when a news release is published, the high impact releases historically have the most impact. However, should a low impact news release miss its prediction by some distance, then the impact on a currency and currency pair's value can be extreme. Whereas, if a high impact release figure is close to the prediction, the impact might be neutral, as the data may have already been "priced into" the market.

The predictions and forecasts made on the economic calendar are extremely important. News organizations such as Bloomberg and Reuters collate this information by polling who they consider to be expert economists on an assembled panel. Typically these economists will be polled on a regular basis to ask for their opinion on upcoming events. For example; they'll be asked if they think the USA central bank (the Fed), will raise interest rates this month, will Eurozone GDP rise or fall, will UK unemployment data improve or degrade, will inflation in Japan rise or fall? Once the opinions are gathered a simple consensus is arrived at by taking the mean value, which is then placed on the various economic calendars as a forecast.

The forecasts may differ slightly depending on whom Reuters and or Bloomberg ask, but in general terms the predictions will be extremely close to each other, irrespective of which calendar you plan your trading off.

Within the calendar, the typical high impact news events and data releases likely to move our markets will include (but not exclusively), official government, or central bank data such as: CPI (consumer price inflation), employment and unemployment figures, interest rate and monetary policy decisions, GDP (gross domestic product), retail sales, industrial and manufacturing production figures and speeches by central bank governors describing policy initiatives.

There are also private company data releases that have the ability to move our markets, we'll highlight one company and its data, due to the impact their releases can have on our markets; Markit Economics, whose purchasing managers' indices, referred to as PMIs, are highly respected data releases that require careful monitoring, by traders at all levels.

Markit's PMIs generate information after the organization has canvassed and collated the views of tens of thousands of purchasing managers, for their expectations over the coming months. In doing so Markit has occupied unique territory in as much as their data is looked upon as leading, as opposed to being lagging indicators, of where our markets may be headed. Markit are asking professionals, at the 'coal face' of business, across all trades, what their expectations are over the next quarter. Markit will then deliver a grading figure, which investors and speculators are now familiar with; a figure above 50 indicators expansion, whereas a figure below 50 indicators contraction.

Markit measures primarily activity in services, manufacturing and production. As an example, they may collate and publish a figure for the UK's and the Eurozone's service activity that misses expecting and the forecast by some distance. The previous reading may have been 55 for the UK and 54 for the EZ. However, the new reading may come in at 51 and 50 respectively, indicating that the UK is just above expansion and contracting, whereas the Eurozone is right on the cusp of entering into what could be termed a recessionary reading. Should these type of examples be published, we could expect quite an impact on the value of sterling and the euro, versus their respective major peers.

There are economic events, outside of the listed set of calendar. Events that can cause our markets to move dramatically, we can term them "outlier events". For example; the organization known as OPEC which (in theory governs) oil production in certain member states, may suddenly announce a reduction, or increase in production. This will in turn effect the price of oil and correspondingly directly affect the value of what's termed "commodity currencies", such as the Canadian dollar, whose value correlates highly with the price of oil, given that the country's major exports are oil and oil based products.

Another outlier could come in the form of a dramatic and sudden political event or announcement, for example; the new president of the USA, Donald Trump, has been prone to making protestations such as: the USA dollar being too high, or too low, or that he'll create tariffs, or induce protectionism methods to boost USA export trade. These simple remarks have had the effect during the first quarter of 2017, of significantly moving values in currency and equity markets.

Learning how to read economic calendar events, how to potentially predict the impact a release will have and to then trade the data accordingly, is a skill that requires practice and research over and above this brief introduction; do you trade the news, or trade the reaction to the news, do you buy the rumor and sell the fact? Once you've decided on your: trading plan, trading method/strategy including strong money management technique (with heightened risk awareness), experimenting with strategies involving news releases, can be considered a valuable next stage in trader development.

Identifying the Major Market Participants in the Forex Market

Governments and Central Banks

Governments and central banks, such as the Federal Reserve in the United States, will trade currencies to in order to improve economic conditions, or to tip the balance of exchange values in their favor, or to intervene to adjust economic or financial imbalances. For example; central banks may lower interest rates to attempt to increase domestic spending, whilst increasing inflation to stimulate the domestic economy. As nonprofit institutions, both governments and central banks are not involved in the forex market intending to earn profits, however, by trading on a long-term basis, some trades inevitably make a profit.

Consumers and Tourists

Consumers purchase goods in foreign countries when visiting, or perhaps over the internet with debit or credit cards. The costs paid in the foreign currency is converted to their home currency on their bank statement. Tourists visit banks, or a currency exchange bureau, to convert their domestic currency into the destination currency when they're intending to use cash to purchase goods and services in the foreign country. Travelers are exposed to exchange rates when they trade their funds.

Businesses

Businesses have to convert their domestic currency when operating outside their home country.  Extremely large corporations convert huge amounts of currency in order to do this. A multinational company such as, for example, Shell oil, will convert tens of billions of dollars each month through their dealer, at their chosen investment bank/s. Not only due to their diverse interests in many countries and continents, but also due to many currencies being highly sensitive to oil price movements.

Investors and Speculators

Investors and speculators need currency exchange facilities whenever and wherever they transact foreign investment. For example; real estate, equities, bonds, bank deposits, will require foreign exchange services. Investors and speculators will trade currencies to attempt to profit from variations in the currency exchange markets.

Commercial and Investment Banks

Commercial and investment banks will trade currencies to assist many of their commercial banking, deposit, and lending customers, without these services international trade in goods and services would prove to be impossible. These institutions are also involved in the currency markets in order to hedge for their clients and for speculative purposes.