The Most Volatile Fundamental Indicators in the Forex Market

  • Home
  • The Most Volatile Fundamental Indicators in the Forex Market
Trading Forex Volatility: 5 Key Economic Indicators to Watch

In this article, we will see the most volatile fundamental indicators.

To be successful as a Forex trader, it is important that you learn to understand the data releases and volatile indicators.

To begin, we will explain key Forex fundamental indicators that greatly influence the FX market.

Top Fundamentals Indicators That Forex Traders Follow Closely

Here are some of the most volatile fundamental indicators:

Nonfarm Payrolls (NFP)

fundamental indicators in forex - NFP

The nonfarm payrolls or NFP is considered the most volatile Forex Fundamental indicator. Nonfarm payrolls are an important market mover for the US dollar and this makes this data a highly anticipated one.

This notable cyclical data is usually released every first Friday of the month at 8:30 am. The release of the NFP helps Forex traders to understand the economic situation of the USA.

But what is the nonfarm payroll? This data reflects the health of the labor market and consequently of the US economy.

NFP is the number of jobs created recently in all sectors except agriculture. In some cases, some government employees or real estate employees are also excluded.

With the outbreak of Covid-19, non-farm payrolls plummeted while at the same time, the unemployment rate soared to 4%.

Nonfarm payrolls can be leveraged to trade Forex because the dollar is the most highly correlated currency. Nonfarm payrolls are analyzed in light of market expectations.

If they are higher than expected, then the dollar usually appreciates if they are lower the value of the dollar depreciates.

Even if the data were positive but contrary to expectations, then it would mean that there could be a weakening of the economy or companies.

The release of the NFP report can influence these currency pairs:

  • EUR/USD, 
  • USD/JPY, 
  • GBP/USD, 
  • AUD/USD, 
  • USD/CHF.

In particular, regarding strategies to sell in trading, due to the volatility of NFPs, it is better to use pullback strategies rather than breakouts.

Interest Rates

fundamental indicators in forex - Interest Rates

Interest rate decisions by central banks such as the Federal Reserve or European Central Bank occur at set monetary policy meetings, usually 6-8 times per year. When rates rise or fall at these meetings, it directly impacts currency volatility.

For example, in June 2018, the Federal Reserve raised interest rates by 0.25% and indicated further gradual rate hikes for 2018 and 2019. This caused the rise of the US Dollar against currencies globally:

  • EUR/USD fell 1% on the day of the announcement from 1.1800 to around 1.1700 as traders viewed higher yields for US assets as more favorable. It continued falling over the following two months by around 4% further as interest rate differentials favored the US.
  • USD/JPY jumped from 109.70 to 111.40, a 1.5% increase in a single day, as Japan was still pursuing a loose monetary policy. It rose as high as 114 over the next six months, nearly 5% from pre-Fed levels.

The dynamic was similar across many pairs as higher US yields attracted global capital and funding into US Dollars.

Gross Domestic Product (GDP)

GDP is the most important indicator of a country’s economy, and it tells us the total market value for all goods and services generated in a specific year. GDP is often seen as an indicator to follow, which is why a significant number of investors rely on two reports that are published months before the final and preliminary GDP report.

These reports can cause considerable volatility in the market. In Q2 2021, for example, US GDP growth soared by over 6% annually compared to expectations closer to 4%. The blockbuster economic expansion catalyzed gains for the US Dollar:

  • EUR/USD tumbled around 1% over the next month from 1.1875 to 1.17 on the back of sheer American growth dominance. US fiscal stimulus and rapid recovery created a growth differential vs Europe.
  • USD/CAD surged around 3% over the same period, rising from 1.25 to nearly 1.29. Improving US fortunes contrasted with still lackluster Canadian growth recovery, strengthening USD valuations.

The common theme is currency appreciation for countries posting standout GDP performance differentials vs global peers.

Consumer Price Index (CPI)

The CPI is surely the most important inflation indicator. It is a statistical estimate created by using the prices of a representative sample of items whose prices are collected periodically. The CPI simply measures a rise in the prices of goods and services and is divided into categories and subcategories.

If the CPI disclosure is higher than expected, it means that inflation pressure is high and the central bank may raise interest rates, which would lead to an increase in the value of the currency.

In November 2022, the Eurozone CPI printed at 10% year-over-year – a significant upside surprise versus consensus forecasts of 9.5%.

This hotter-than-expected inflation reading sparked intense selling of the Euro currency:

  • EUR/USD tumbled 1.1% on the day of the CPI release, plunging from 1.0350 down to 1.0230 in just a few hours. This demonstrated the immediate scale of selling pressure.
  • EUR/JPY also sank 0.9% as the EUR cratered against safe-haven JPY. The pair fell from 146.20 before inflation to 144.90 in the next trading session.

The pummeling of the Euro across pairs reflected traders’ belief that the alarming inflation levels make further interest rate hikes from the ECB necessary – hiking into economic weakness is viewed as negative.

Retail Sales 

This is an indicator released each month and is critical information for FX traders as it exposes consumer spending.

The higher the number, the greater the expectation of the economy. So a positive report warns that the expectation is greater for upcoming GDP growth.

Since fundamental analysis is based on observation and analysis of macroeconomic scenarios, we will look at the releases more closely.

In June 2017, US retail sales, which measures the monthly change in consumer spending at retail stores, unexpectedly fell by 0.2% compared to economists’ forecasts projecting a gain of 0.2% for the month.

This negative retail sales surprise sparked immediate selling pressure on the US Dollar:

  • EUR/USD jumped roughly 0.7% in the hour after the retail sales report release, from 1.1420 to 1.1500. The surprise poor reading on consumer spending cast doubts over the USD economy.
  • USD/JPY dropped around 0.9% over the same period, falling from 114.25 to 113.30. The weakness in retail consumption activity bumped the USD against its safe-haven Japanese Yen peer.

So in short, downside data surprises like an unexpected drop in retail sales can expose domestic economic weakness and trigger significant currency depreciation. Here, the surprise contraction in American consumer spending led to heavy selling that depressed the US Dollar across multiple major pairs.

Take away

In conclusion, economic indicators like CPI, retail sales, GDP, and interest rates represent the fundamental drivers that shape currency valuations. Their scheduled releases generate outsized volatility as traders react to the implications for monetary policy and relative growth across competing economies.

By staying updated on market expectations for these events through calendars and economist estimates, currency traders can position themselves to trade the frequently significant market swings that accompany these economic data points. Though technicals play a role in forex markets too, these fundamentals represent the macroeconomic landscape that underlies sustainable long term trends between currencies and countries.