Trading Tip: How to Look at Economic Data

Dozens of economic indicators are released each trading week, but very few actually move the market. I always see beginners questioning the usefulness of fundamental analysis because they see the numbers in eg US economic data come out well but the market does nothing, or sometimes does the opposite.

This can happen simply because the market is not focusing on that specific report, or the release is mostly in line with expectations. The market reacts more to surprises or to specific things it focuses on.

If an economic report comes out as expected, there’s really nothing to be learned from it unless the details say something different. Moreover, if the market is not focused on this economic report, then even if it is surprising, there is a good chance that the market will not move much anyway.

You need to know what the market is focusing on to trade better economic reports. If the market is focused on hiring because the central bank has made it clear that it will adjust monetary policy accordingly, then inflation reports won’t be moving much in the market and vice versa.

You should also know your position in the business cycle. If you have just come out of a recession, no one will care about inflation, but rather focus more on employment, durable goods orders, ISM standards, building permits, retail sales, etc. If it lags in expansion and inflation is rising, inflation data will take center stage because the central bank will slow it down and that will dampen economic growth as well.

There is also a kind of hierarchy based on a country’s release of economic reports. In general, the US data is the most important because the US is the largest economy in the world. There is a saying that says “When the United States sneezes, the world catches a cold.”

This is just to highlight how important the US economy is. Therefore, if the US economy is doing well, it can create positive risk sentiment (as long as the rest of the world is not doing poorly) and that when good US data comes out can actually make the US dollar weaken, as we have seen. In 2020 the exit from the corona virus crisis.

On the other hand, weaker and weaker US data could cause negative risk sentiment and make the dollar rise as a safe haven.

At the moment, for example, the market is particularly focused on inflation data. why is that? Because the US inflation rate is more than double the Fed’s target of 2% per year and is still rising.

This in turn makes the market price in a faster tightening process by the Fed and all the things that can come from that like economic slowdown, policy error, recession etc. Now the market doesn’t care at all about unemployment claims or some UK or EU data for example, because what could happen in the US will extend to other markets.

You see, there is a lot more to consider when looking at economic data than just noticing whether the report is better or worse than expected or if the economic calendar indicates that it is a low or high impact event. You need to have a broader view and filter out what is important in this particular context to trade better economic releases.

This article was written by Giuseppe Dellamotta.

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