Macroeconomics plays an important role in Forex trading. This is essentially what fundamental analysis means: The currency trader should look at the Forex dashboard and see those currencies as economies. They are effectively representing an economy, country or region in the world.
It means that understanding how a respective economy is performing entails having an idea about the direction the currency is going to move in. This makes it a powerful tool for trading Forex in general. In other words, comparing the two economies should result either in them being the same, or in one performing better than the other.
Interpreting two economies means considering macroeconomics. It is not only one specific economy that traders consider, but the implications in the overall global picture. Macroeconomics reflects these implications as traders anticipate future currency moves. When the macro-environment is shifting, this is due to specific events that have the effect of changing the way the markets move compared to how they did before.
The best recent example comes from the United States of America, and how the biggest and most influential central bank in the world dealt with the financial crisis. As mentioned here on the Forex Trading Academy in different articles, central banks meet on a regular basis to evaluate the status of the economy, and to set the interest rates and monetary policy. While this is true to some extent, markets still react to them.
At the peak of the financial crisis, the Fed slashed interest rates to zero in an overnight move! For more about a risk-off trading environment, please refer to the previous article here on the Forex Trading Academy. By the time the situation became clearer and clearer, markets around the world started to unravel, and the Euro currency has been sold aggressively.
Related macroeconomic factors started to affect economies far away in other parts of the world. The central bank needed to react fast. When investing, traders do not consider the day-to-day economic releases, but the shifts in the macroeconomic picture.
For these shifts to come into play requires time. All costs associated with such a trading style are considered here, one good example being the swap that is paid. If the swap is a negative one, then keeping a position open for a long period of time is a costly process. These costs should be considered, as they will affect the balance in the trading account. Macroeconomics in Forex Trading Macroeconomics plays an important role in Forex trading. Journal of international money and finance 20, no.
Journal of the Econometric Society, pp. Was the information useful? Macroeconomics in Forex Trading. Get the latest Forex updates now! Receive the latest Forex broker reviews and offers Learn more about trading Forex through our academy section Start trading with a demo account and teach yourself to be a trader No thanks, maybe later.More...