The economic calendar is a calendar that outlines specific economic releases and key market events and announcements. Investors use it to inform themselves about upcoming economic news and how it may potentially influence the currency market.
“Economic calendar” is quite a general term. Most of the news refers to the economic activity in major countries around the world (typically G7 nations – United States, Japan, United Kingdom, Canada, and the three most important countries in the Eurozone), but also considers central bankers’ speeches, summits, elections, referendums, etc. In other words, investors must think of the economic calendar as a diary of upcoming events that have the potential to impact the financial markets.
For instance, even the earnings calendar for the stock market in the United States can impact the FX market. If a company is due to release its earnings and it is a major component of, for example, the DJI (Dow Jones Industrial Average), its results may create a snowball effect and ignite a move higher or lower on the index. Because JPY pairs are strongly correlated with the U.S. equity markets, the move may trigger a similar reaction in the currency market. Hence, economic news or data not strictly related to the currency market can influence it nonetheless.
How to interpret the calendar
As mentioned earlier, the economic calendar is known in advance. Not only do investors know what type of data will come out, but they will also consider the potential market impact of such data. Using stars or colours, Forex brokers let investors know the importance of any given event and the potential impact it may have on the financial markets.
Let’s consider the events of the day when this article was written. The single star denotes second or even third-tier data, with little or no perceived impact on the currency market. The economic calendar always shows a column with the previous data, one with the forecasted data, and one with the actual release. Depending on the potential economic impact (positive or negative for a certain economy), investors expect a similar move to occur on the relevant currency.
For example, the Unemployment rate is one of the most important economic releases in a country. One possible economic interpretation is that the lower the rate, the better for the economy. Hence, positive for the currency. Therefore, if the unemployment rate comes out better (lower) than the forecast, the currency may appreciate. If not, it may depreciate.
Furthermore, investors build complicated economic models and trends in an attempt to predict what effects different economic releases may have. And, based on their economic analysis, they position for the announcement by taking long or short positions on a currency pair.
The next event on the economic calendar is marked with three stars, the maximum possible. The Chairman of the U.S. Federal Reserve (Fed) will make a speech. Whenever central bankers speak, the markets listen. And, they react based on the speech’s interpretation: hawkish or dovish. Data relative to central bank meetings and press conferences, GDP (Gross Domestic Product), jobs market, inflation, retail sales, and other consumer-related data, usually have a strong impact on the currency market’s volatility. Investors know this in advance; plus, they can understand the potential impact by checking the economic calendar. Therefore, we can deduce that an economic calendar is a mandatory tool for proactively handling a trading portfolio.
- Investors know the economic releases for the week ahead or more.
- The economic calendar always shows the potential impact on market volatility.
- Interpreting the economic calendar goes hand in hand with the economic impact of the data; positive impact, bullish currency – negative impact, bearish currency.