European Union Trading Fundamentals

Euro-Trading Fundamentals

For traders who employ fundamental analysis economic data releases are the primary focus of each trading day. While breakfast is always spent perusing the day’s market headlines, scanning for events that may have affected their preferred assets through the night, the day begins proper with a glance at the economic calendar in order to see what important information is due to be released and at what time.

The unwritten rule behind fundamental analysis remains that at any given time an asset is either under- or over-valued, and that, in time, market pressures will cause it to fall in line with its true value. This is why economic data releases (also known as economic indicators) are so important to traders. They provide the facts and figures behind what is really going on financially in a country or economic bloc.

Economic Indicators.

Economic indicators fall into three broad categories:

Leading Indicators:

These generally move before a country’s economy does, as such they are used by traders to take short term positions on the relative health of a country’s economy. Stock market return figures are particularly useful leading indicators as they move in just this way, tending to rise or fall before the relevant country’s economy registers the change. Other useful leading indicators to keep an eye on are the results of consumer expectation surveys, the number of building permit applications currently in the works, and the money supply of a country or region (i.e. the aggregated monetary assets at a given time).

Lagging Indicators:

Lagging indicators, as the name suggests, usually report changes that have already been felt by an economy. Bollinger bands are considered lagging indicators, as are any reports that reflect the accumulated data of past events. An interesting incongruity in fundamental analysis is that many of the indicators traders focus on and give weight to are actually lagging indicators. Though it may seem somewhat counter-intuitive that lagging indicators could exert such tangible pull on markets but nevertheless they do. This is because of their qualitative effects, much of the trading activity that is conducted on a day to day basis boils down to trader psychology. Market sentiment can change the fortunes of a currency as much as, and some would even argue more than, the numbers on a balance sheet. Interest rate figures, unemployment statistics and trade balance figures are a couple of important lagging indicators to keep abreast of.

Coincident Indicators:

Coincident indicators move at the same time as economies do, thus revealing a great deal about the current economic state of play. Non-farm payrolls and industrial output figures are both examples of coincident indicators and should be closely monitored by traders wishing to gauge the health of an economy, and how its currency is being valued.

Economic Calendars.

All binary traders should use an economic calender on a daily basis. There are many free ones available online and most of these will allow you to set search parameters so as to only return events that are of interest to a specific country or region, as well as filtering important data releases from ones with less pronounced effects. Just as beginner binary traders will tend to start trading one or two preferred assets, they will also begin by using an economic calendar to look for high impact data releases relevant to their assets of choice. In this way they get used to trading on the occasion of these important announcements and begin to observe the ways in which they work to affect the markets. The following is an introduction to some of the most important data releases that many of our euro traders look out for when first using an economic calendar.

E.U Minimum Bid Rate.

This is an economic indicator of the utmost importance. Also known as the Main Refinancing Rate, it is essentially the rate the European Central Bank (ECB) charges other banks in Europe’s 27 member states to borrow money. Minimum bid rate is an important tool in the ECB’s fiscal policy. Changes in this rate affect other interest rates across Europe’s banking system and have a direct effect on the value of the euro. Minimum Bid Rate is announced on the first week of every month and should be monitored in conjunction with the ECB press conference that closely follows the release. This is because, by and large, the data itself does not take the markets by surprise, in fact they react much more animatedly to the sentiments in the ECB president’s speech, rather than the data release on its own. This is a perfect example of sentiment exerting a more noticeable effect on trading activity than the data that supposedly grounds it.

Interest rates are important to traders because they are central to a currency’s value. Higher rates mean less of an incentive to borrow and result in a devaluation of the euro. Lower rates have the opposite effect and generally serve to increase the currency’s strength.

E.U Employment Change.

Employment change statistics are also of particular interest to traders. A county’s labour force translates directly to its consumer spending power and economic vitality. The process is a cycle that begins with the number of adults in employment and ends with consumer confidence, increased demand, and the subsequent creation of more jobs. This is why employment is a key economic indicator to be aware of and prepared for. There are a variety of employment statistics that are regularly released but Employment Change is the one that most traders look out for. Essentially it clues the markets in on how many jobs have been created or lost on a month by month basis. Even though it is a lagging indicator, typically released a month in arrears, it is extremely important as it gives a good picture of both an economy’s future consumer conditions and its potential for prospective business investment.

Matters are somewhat complicated in the case of the E.U because the employment change statistics from several key nations are released in advance of the overall E.U employment figures. As a result these earlier reports are much more relevant to traders. The employment change reports from Germany and Spain are particularly valuable as gauges of the region’s economic strength going forward, and are more eagerly anticipated by traders than the comprehensive euro-zone numbers.

E.U Trade Balance.

Usually expressed in terms of millions of Euros, and also by the yearly percentage of change, trade balance statistics are derived by comparing the the value of a nation’s, or in the case of the E.U, an economic bloc’s imports and exports over a given period of time. If the figure is negative then more goods have been imported than exported, this is referred to as a trade deficit. If the figure is positive then more goods have been exported than imported, which is known as a trade surplus. Trade balance reports are extremely important events as they are central to the E.U’s balance of payments. They are also particularly useful to currency traders as they provide valuable insights into the strength of the euro.

Trade deficits adversely affect the strength of the euro. If a trade balance report reveals a deficit over a given period then more capital is leaving the euro-zone than entering, this is due to imports being higher than exports. Conversely a trade surplus relates to an influx of currency in exchange for exported goods. Unless massive outflows of cash negate the benefits conferred by a trade surplus the effect is generally beneficial to the euro’s value.

Although E.U Balance of Trade should be regarded as an indicator of high importance, there are several factors that contribute to lessen its direct impact. Firstly it is a lagging indicator so its effects are limited to the market sentiment it inspires, which can be negligible if the figures are not significantly higher or lower than forecast. Secondly the report is publicised almost two months after the period of time it provides data for, so the impact of the results have typically already been felt by the market before the report’s release. Finally, the content of the report is generally well-anticipated by the market, so its release provides more of a confirmation than a surprise. Nevertheless it is still considered an important data release due to it being able to significantly affect market sentiment, especially at times of economic instability.

E.U Gross Domestic Product (GDP):

Statistics for European Gross Domestic Product are again slightly complicated by Europe being a federation of countries that all contribute to its overall GDP. Gross Domestic Product is basically the aggregated value of all the goods and services produced by a country or economic region. As with all GDP releases if the actual figure is higher than forecast it means good things for the currency in question. E.U GDP is released every quarter but is announced 45 days after the end of the previous quarter. This makes it a lagging indicator. The impact of this specific release is also lessened by the fact that Germany and France both announce their own GDP figures in advance of this report. The economies of these two countries account for close to half of the region’s GDP, so traders find it more fruitful to keep track of, and trade on, the individual GDP releases of Europe’s major players rather than trading on the sentiment generated by this specific indicator. It is also important to keep in mind that GDP is announced in waves. In the case of the E.U as a whole, Flash GDP is released first (also known as the first estimate), followed by the Revised GDP figure and then Final GDP. Similarly the GDP readings of individual member states are usually released in pairs, with a provisional figure announced first followed by a final reading. It is important to keep in mind that the initial release has a far greater impact on the financial markets even though it is not definitive.

E.U Retail Sales Report:

The E.U’s monthly sales report is another important economic data release to look out for. It is released 35 days after the end of each month, making it another lagging indicator. The report monitors consumer spending patterns across the region but just as in the case of Employment Change and GDP its impact is lessened by Germany and France releasing their own figures slightly in advance. Traders interested in capitalising on these statistics will usually give much more weight to Germany’s figures, this is because it is the strongest of the euro-zone economies and as such its Retail Sales Report is a very good overall indicator of how well things are going for the entire region. The importance of these reports hinges on the fact that consumer spending accounts for the majority of all economic activity, and so it is quite an accurate gauge of economic strength. If the figures come in better than expected they will inevitably result in a strengthening of the euro.

Previous articleThe Straddle Strategy for Binary Options
Next articleForex Trading and the Agency Model
, also known among professionals under her nickname “Moneymaker”, is an experienced stock broker and Forex trader. Promoting and guiding new traders to the binary options market is Nancy''s way of saying "thank you" to the industry that helped her realise her dreams.