Forex 101

Forex 101

Currency markets enable the global economy to operate continuously, facilitating the transfer of goods and services from one place to another. The market is highly sensitive to news that can alter people's perceptions of the value of a currency. Interest rates and statements by the Federal Reserve, along with the release of economic data, generally have the most significant impact. Below, we highlight some of the main types of news that influence the Forex market.

During the moments before and after these announcements hit the market, expect increased volatility and wider bid-ask spreads in the currency ETFs you trade. Keep in mind that a news event affecting one currency or country can impact other currencies—even those that may initially seem unrelated. Thus, news events, such as those discussed below, deserve attention when released by any major country. The names of these releases may vary by country. Find an economic calendar listing news and data reports scheduled for publication in each country. This will help you stay informed about events that could affect your currency ETFs. Many such calendars rate news events from high to low, based on their expected market impact. Additionally, you can use paid analytics services that carefully select and analyze information while providing trading advice.

Key News Events and Their Effects

• Federal Reserve or Central Bank Announcements: News releases from banking committees, financial authorities (like treasuries), or reserve banks related to interest rates or economic outlooks can indicate certain prospects and long-term trends. These are always closely monitored and traded.
• Consumer and Producer Price Indices (CPI, PPI): These indices reflect inflation data and, therefore, provide insight into potential interest rate changes. They also influence short- and long-term currency rate movements.
• Gross Domestic Product (GDP): This measure of a country's economic performance is valuable fundamental data for currency traders. Typically, GDP growth strengthens a country's currency. However, such data is often traded speculatively at the moment, leading to volatility spikes rather than trends.
• Housing Market Sales, Retail Sales, and Unemployment Data: These are important indicators that provide traders and investors with data on consumer finances and the economy's health. While often traded speculatively, when combined with GDP, price indices, and Federal Reserve statements, they can drive trends.
• Political Speeches: Statements by significant figures, such as heads of state, Federal Reserve members, or treasury department officials, can influence markets based on their bullish or bearish comments. For example, Federal Reserve statements are often categorized as "hawkish" or "dovish."
• Manufacturing and Construction Data: Indicates growth or contraction in the manufacturing sector—a measure of economic health.
• Trade Balance, Balance of Payments, Current Account, and Debt Levels: These figures reflect economic health and growth or contraction, exerting long-term effects on the supply and demand for a currency.

Trading Tips for ETFs

Currency ETFs listed on U.S. markets are active during the U.S. trading session, but the underlying currency of the ETF trades around the clock. The most significant activity occurs during the U.S. and London trading sessions. Since currency ETFs are "thinly" traded outside U.S. market hours, exercise caution during opening and closing hours, as sharp moves or gaps may occur. These can bring ETFs in line with their NAV (net asset value), or large trades may cause significant deviations from NAV.

Currency ETFs are prone to frequent price gaps, and ETF traders may not capture all intraday movements available in the 24-hour Forex market. As with any trading, use stop-loss orders to manage risk. Employ limit orders in your trading to secure favorable prices, and, most importantly, maintain discipline.

Conclusions

Currency ETFs provide investors with access to the Forex market through an exchange broker. Currency ETFs can be divided into two main categories: currency-specific and baskets. Each product offers unique advantages and certain drawbacks. Currencies can be volatile due to high speculation and sensitivity to news. It is essential to closely monitor global news, both scheduled and unexpected, to stay informed about events that may shape future trends.

ETFs tied to Forex instruments are ideal for intraday trading during the most active trading session—the U.S. session—or for long-term investing in specific currencies and multi-currency baskets.

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