News and macro
Lesson 22 of 31 in the course “Forex”. Free, with animations and a quiz.
Inflation → rates → currency
Macro means the big economic numbers that move currencies. Inflation is rising prices in a country. When it is high, the central bank keeps its rate high; in the US that is the Fed. The rate is the price of money, the interest on loans and deposits. Bond yields, the interest paid on government debt, rise too. Money flows to where it earns more, so the currency often strengthens. Often, not always.
The news calendar
Key numbers come out on a schedule, shown in the economic calendar. The big ones for the dollar: CPI, the inflation report, once a month. NFP, the report on new US jobs, usually on the first Friday of the month. And the Fed's rate decisions. In those minutes price jumps and the spread widens. The basics: check the calendar in advance and do not enter a trade at the moment of the release.
The news is already priced in
Before a number comes out, analysts publish a forecast, and the market adjusts to it in advance. So what matters is not the number itself but its gap from the forecast: the surprise. In line with expectations: a weak reaction. Way off: a sharp one. And at the moment of surprise the crowd swings between fear and greed, like on a 0–100 scale. Do not be part of that crowd.
A surprise, using CPI
For example: monthly CPI, meaning how much prices rose in a month in percent. Expected 0.3%, came in at 0.3%: a match, already priced in, weak reaction. Another case: expected 0.2%, came in at 0.4%. Inflation is double the forecast, and the market starts expecting rates to stay high for longer. Sharp reaction. The numbers are made up; the point is the gap.
Check yourself
- What does a central bank usually do when inflation is high?
Correct answer: Keeps its rate high. A high rate makes loans pricier. People and companies spend less, and price growth slows. Printing money does the opposite and fuels inflation. - What moves the market most at a data release?
Correct answer: The gap between number and forecast. The market priced in expectations ahead of time. Only a surprise, the gap between actual and forecast, causes a strong move. - Big news is coming soon. What should a beginner do?
Correct answer: Not enter at the moment of release. In those minutes the spread widens and price jumps both ways. A stop can be filled at a worse price.