HOW TO ANALYSE AN ECONOMIC RELEASE

Types of economic releases

Economic data is collated and released by central banks, government departments, research companies, and universities.

Interest rate policy is set by central banks at regular intervals. These decisions have the most direct impact on the economy as they affect the price of bonds and the cost of borrowing. Central banks also release data concerning a country’s trade balance and other national accounts.

GDP growth data, employment data, retail sales figures, and industrial production data are gathered by government departments and give market participants an idea of how strong or weak the economy is. Other more qualitative data is gathered in the form of industry surveys about investor confidence and business sentiment.

How do markets respond?

Before a data release, news agencies gather forecasts from economists and analysts and publish a consensus estimate for each release. Market participants then compare the forecast with the previous release to make assumptions about the health of the economy. These assumptions determine how prices move ahead of a release and what data is “priced in” to the market.

When the data is released, the key factor is the variance between the actual number and the number that was expected. So, a positive number can lead to falling prices if it’s lower than what was expected – even if it’s still a good number.

Economic releases can also be interpreted in different ways, depending on what aspects of a market investors are focussing on. For example, a strong GDP figure in the US could be interpreted as good for risk assets, leading to USD weakness. Or, it could be interpreted as inflationary, which could mean higher rates leading to a stronger US dollar. It all depends on what market participants are focussed on.

Preparing for a news release

As a trader, you should always be aware of the economic indicators that will be released in the next three to five days. You should also be aware of which markets they may affect, and whether or not you have positions that may be affected. 

While there are numerous news releases every day, the majority are not significant for most markets. Others, particularly major news about the US economy, can potentially have knock-on effects for every region and asset class.

One Financial Markets’ economic calendar includes all the major releases you should be aware of. The first thing to do is note the major US and European releases, and the releases relevant to the markets you are watching or have positions in.

Next, you can look at financial news sites and social media, to see what other traders have to say about an upcoming news release. If everyone seems to be in agreement, then a number in line with consensus will have very little effect but may lead to some profit-taking. If the actual number is a surprise, chances are a lot of people will be on the wrong side of the market, and a large move could follow.

If there isn’t agreement, the market is probably evenly balanced – but that could also create opportunities. After the release, buying or selling could become more dominant and give a clearer sense of direction.

You should also look at what the market is most concerned with. This could be growth, inflation, trade, or geopolitical issues. Then think about how better or worse than expected data could affect those aspects of the market.

Finally, you should consider any open positions you have and how a news release could affect it. That doesn’t mean you should close any position that could be negatively affected – but you may have a trade that’s not really working and not worth the extra risk.

Reacting to a news release

The first point to note is that you should never rush into making a decision after FX events like economic data releases. Markets very often react in a particular way, and then find the price reversing in the opposite direction.

You should only respond quickly if you already have a plan for the scenario that is unfolding. If you don’t, then it’s best to think through the implications of the data, and the way the market is reacting. Very often, markets have knee-jerk reactions which turn out to be premature – but in the process, great opportunities can be created.

Usually at some point after a release, the initial knee-jerk reaction will either be confirmed or rejected. Either way, the price move that follows can offer more reliable trades with less uncertainty.

Conclusion

There are many subtleties to the way news releases affect markets. The best way to get to grips with the most important releases is by following market news, sentiment, and opinions before and after a release. By doing so, you will begin to see the patterns in the way markets respond to economic data.

It’s also a great way to learn more about the fundamentals that affect markers, particularly forex markets.

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