Understanding the Effects on Currency Pairs

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Welcome to the second lesson of the News Trading and 60-second Options module. On this lesson we will teach you how to understand the effects of high impact events on the affected currencies.

Let’s start with the consumer price index. The CPI measures the changes in the price level of a basket of consumer goods and services purchased by households. The CPI is one of the most used barometers for identifying periods of inflation. The percentage change of this index over a period of time results in the amount of inflation during a set period. This index gives an idea of the overall cost of living.

Retail sales measures the aggregated sales of retail goods over a period of time. Typically the data is something that the model changes from country to country. This report captures in-store sales as well as catalog and other out of the store sales. It’s the foremost indicator of consumer spending, which accounts for the majority of the economic activity.

The unemployment rate measures the total workforce that is unemployed and currently seeking employment. This data is closely looked at by traders because a rising rate is seen as a sign of a weak and unstable economy. The consumer sentiment index, the CCI, is a measure of the sentiment of the consumer towards the overall economy. This index serves people and their feeling about the individual financial situation, the overall economy, and the future of both.

One of the closest monitored services is the University of Michigan Consumer Sentiment Index, which measures the sentiment of consumers towards the US economy. The GDP, the Gross Domestic Product, measures the monetary value of all finished goods and services within a country’s borders in a specific period of time. The GDP is used as an indicator of the economic health of a country. The GDP also measures the country’s standards of living. The only thing that may be left to criticism is that it doesn’t take into consideration the underground economy.

The trade balance simply measures the difference between imported and exported goods over the reported period of time. This measure is a barometer for the economic and commercial health of a country. The more goods and services are exported, the better.

The initial jobless claims is the number of jobless claims filed by individuals seeking to receive state jobless benefits. This number is closely watched by traders because it provides insight to the future strength of a country’s economy. Higher initial claims means a higher rate of unemployed citizens, which can correlate with a decline in new jobs and a weakened economy.

The federal funds rate in the U.S. is the rate at which depository institutions lend money to another depository institution overnight. The higher the interest rate, the more expensive it is to borrow money. This interest rate, however, only applies to the most creditworthy institutions for a very short term period. This rate can be viewed as the base of all interest rates in the economy. The targeted range of this interest rate in the US is from 0% to 0.25%, and it has been maintained from December, 2008.

The non-farm payrolls measure the number of the people employed during the previous month. This index excludes the farming industry, and it is one of the events which has the highest impact on the markets. This is because job creation means more consumer expenditure, which translates into a healthier economy. On this lesson we only wanted you to know what these high impact event means, and on the next lesson we will teach you how to read the numbers that are being released.

Adam

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