Effects of Macroeconomic Events in the Forex Market

The traders and investors that trades in the Forex market in the short term focus mainly on the most important economic news of the week and how they can affect the prices of different currency pairs in the market. This can work well for many traders, however it is also important to take into account the most important economic events worldwide. The reason is that large-scale macroeconomic events usually generate significant movements in markets. The effect results in a change that goes beyond a simple variation in prices that may last one or two days, depending on its scope and importance, and have the potential to transform the viewpoint or fundamental consensus for periods that can last for months or years.

For example, events such as wars, natural disasters, international high-level meetings, political uncertainty, and others, often have significant physical and psychological effects on the financial markets like Forex because of their rarity and their irregularity. These events can cause radical changes in the currencies value, so the trader should keep an eye on them, analyze and understand the underlying direction of the market sentiment before and after the macroeconomic event occurs, and anticipate the market reaction. All this can help investors make high profits or at least allows you to prevent major losses that could even end up with your trading account.

This is the base of fundamental analysis applied to currency trading. More information in the following article: Fundamental analysis in Forex

Key macroeconomic events that must take into account by the trader

Presidential elections in countries like the United States.
Important summits of the major powers.
Meetings of the major central banks.
Important meetings of the G7 or G8 group finance ministers.
Major changes in monetary policy.
Possibility of war because of increased geopolitical tensions.
Possible payment default from nations with large economies in the international environment.
Semi-annual speech on the economy of the United States President of the Federal Reserve before the United States Congress.

Here are some real examples of relevant macroeconomic events that had a significant effect on the market:

United States Presidential Election in 2004

An example of an important event that affected the prices in the Forex market was the presidential election in the United States in 2004. The political instability usually generates a perception of instability in the foreign exchange among the investors. In 2004, the presidential elections in the United States were highly contested, which together with the positions of both candidates in relation to the fiscal deficit, produce a general downward trend in the dollar. This feeling was further increased due to the lack of international support for President George Bush for his decision to attack Iraq and overthrow Saddam Hussein.

Because of this, in the 3 weeks leading up to the American elections, the value of the euro climbed about 600 pips against the dollar. As the election day approached, Bush’s victory seemed increasingly clear and when it was confirmed there was a selloff of the American dollar against other major currencies, as the market had projected a high probability that the general conditions that prevailed at that time were to continue.

The day after the election, the EUR/USD rose another 200 pips and followed up another 700 pips before reaching its peak, which occurred six weeks later. All this movement of the EUR/USD occurred in a period of two months, which may initially seem a long time, however, this macroeconomic event certainly had a significant effect on the markets. Traders who tracked this event and traded in accordance managed to make big profits.

This scenario was important even for short-term traders since, in a market where the dollar was lower during the period before the elections, the most prudent and beneficial strategy would have been looking for opportunities to buy the EUR/USD in each price correction. Instead, trying to sell when the price rose and rose again would surely have caused great losses.

Meeting of the G-7 in Dubai in 2003

Currently, the countries of the G-7 are the USA, Germany, UK, Japan, Canada, Italy, and France. In total, they represent about two-thirds of global economic output. In general, all meetings of the G-7 have the same level of importance, in fact, the only time the market really stirred for meetings of finance ministers of the G-7 is when major changes are expected.

An example of this was the meeting of September 22, 2003, which was a very important turning point for global markets. In the case of Forex, after this meeting, the American dollar depreciated significantly because the finance ministers were interested in seeing “greater flexibility in interest rates.” Despite the rather moderate tone of this announcement, the market interpreted this as a major change in policy, which led to a high effervescence in the prices of currency pairs.

The meeting in September 2003 was also important because at that time the United States trade deficit was increasing excessively, which was a very serious problem. With the depreciation of the dollar, the currency pair most affected was the EUR/USD, while China and Japan intervened decisively in their currencies to prevent excessive appreciation against the greenback. For this reason, the general expectation was that the finance ministers of the G-7 would publish a joint statement criticizing the interventionist monetary policies of both Asian countries.

As the date of the meeting approached, the dollar began to experience a decline in price due to a general sale. At the time there was the announcement at the end of the session, the EUR/USD experienced a rise of 150 pips. While this initial movement was particularly strong during the period between September 2003 and February 2004 when the next meeting of G-7 was produced, the dollar experienced a decline of 9% against the British pound, 11% to the euro, 7% against the yen, 1.5% against the Canadian dollar and 8% weighted according to the trade balance. To put these numbers in perspective, a price movement of 11% is equivalent to approximately 1100 pips.

Therefore, the effect of long term this meeting was much more important than the short-term effect, as this event was the ability to change the mood in the market.