UKArticles (6)
Trading the Non-farm payroll (NFP) report
<h2>What is the NFP report?</h2> <p>Non-farm payroll (NFP) is a monthly report on nonfarm employment numbers in manufacturing, construction and goods, which totals to around 80% of US jobs. It contains information related to the unemployment rate, job growth, and other key employment statistics.</p> <p>The report does not include US jobs in private households, the federal government, nonprofit organisations, and as the name suggests, farm workers. Data within the Non-farm payroll report is measured by the <a href="https://www.bls.gov" target="_blank">Federal Bureau of Labor Statistics</a> through the Employment Situation report and is typically released on the first Friday of every calendar month.</p> <h2>Why is the Non-farm payroll important?</h2> <p>The report is an important economic indicator of how the US economy is performing, as it reports on the number of people employed or unemployed in the US. It is considered one of the most consistent news announcements that can cause large rate movements that result in volatile markets, particularly affecting major currency pairs in forex. As a stand-alone report, it is important in its own right, as an indication of whether the economy will strengthen or decline; for example, if the unemployment rate is high, it could indicate a declining economy.</p> <p>However, it is also an important piece of a jigsaw when looking at other key factors that influence the US economy, such as economic policy-making. Interest rates, for example, are set by the <a href="https://www.federalreserve.gov/monetarypolicy/fomc.htm" target="_blank">Federal Open Market Committee (FOMC)</a> in the monthly Federal Reserve meeting, and the board will look at the Bureau of Labor statistics NFP figures when deciding if they are going to lower or raise interest rates in their monetary policy. Changing interest rates will have a big impact on markets such as forex, commodities and stocks, and can cause big volatility.</p> <h2>Non-farm payroll report calendar</h2> <p>The NFP is released typically every first Friday of the calendar month at 13.30pm (GMT), below you can see the dates for 2024.</p> <p><img alt="NFP-calendar" src="/getmedia/7ade571b-7f2e-4ac4-acb2-32f69f83074d/NFP-calendar.png" title="NFP-calendar" /></p> <h2>How does the NFP affect the markets?</h2> <p>The NFP report is important to traders as it can be a cue to analyse how other factors will adapt, such as the Federal Reserve and other government agencies, to attempt to move the economy in a certain direction. It is just one factor of many that can act as a catalyst for volatility and market price changes.</p> <p>The government will adapt policies to combat issues within the economy such as inflation or recession. If the NFP report indicates employment is dropping, it could indicate that the economy is declining. This, in turn, will prompt the Federal reserve to adjust interest rates to restore balance. If rates adjust, this will trickle down into the markets.</p> <h5>Trading on Non-farm payrolls</h5> <p>Firstly, monitor the report. The primary focus of the NFP report are the employment figures, mainly on jobs added or reduced. However, there are smaller components you can also watch out for when trading.</p> <p><strong>Take note of sector specific data</strong></p> <p>If the NFP report shows a decline in employment, traders will monitor which industries or sectors this decline is coming from. It could indicate the sector itself is struggling, which can have a knock-on effect to stocks and shares.</p> <p><strong>Don't just focus on figures, also focus on earnings</strong></p> <p>If average hourly earnings have dropped, but the employment figures are stagnant, this could also indicate a decline. It could also point to trouble where we could see the workforce output fall as employees could leave the workplace due to declining earnings. On the other hand, higher earnings could indicate wage inflation.</p> <p><strong>Monitor previous reports</strong></p> <p>As the scale of the NFP report is so large, it is often subject to large revisions of the previous headline figures. If this happens, it could cause a sudden jolt in the markets.</p> <p>When trading on the Non-farm payroll report, economists will try to predict what the headline figures (or NFP number) will be on a monthly basis, while also monitoring other reports, rates and financial events. Trades will then be placed on whether they think this result will make markets go up or down. The markets most affected by the NFP report are forex, indices and commodities.</p> <p>A declining report may not be bad news for traders since it's possible to potentially benefit from this outcome with <a href="/uk/trading-academy/cfds/what-are-cfds/">contracts for difference (CFDs)</a>. CFDs allow you to trade volatile markets whether they go up or down; you just need to correctly predict which way the market will go by going long or short. You can use <a href="/uk/trading-academy/cfds/risk-management-tools-in-cfd-trading/">risk management tool</a> such as stop loss and take profit to minimise your risk, but as always with trading, act with caution. Plan your strategy, monitor reports such as the NFP and take advantage of our built-in economic calendar to monitor other major financial events on our award-winning app ThinkTrader.</p>
What is the Consumer Price Index (CPI), and how does it affect the markets?
<p>What is the Consumer Price Index (CPI), and how does it affect the markets?</p> <h2>Types of CPI</h2> <p>The BLS regularly produces official CPI estimates based on two population groups – CPI for all urban consumers (CPI-U) and CPI for urban wage earners and clerical workers (CPI-W).<br /> <br /> The CPI-U covers almost 93% of the entire US population and is the main report used by the Federal Reserve. As such, when we talk about the CPI in this article, we’ll be pertaining to the CPI-U data.<br /> <br /> On the other hand, the CPI-W covers the prices paid by urban wage earners, clerical workers, self-employed individuals, short-term workers, unemployed individuals, and retirees.</p> <h2>How is the CPI market basket determined?</h2> <p>The US Bureau of Labor Statistics (BLS) surveys consumers in private households nationwide as a reference population, collecting information on their spending habits and frequently purchased items. The data collected determines the weight of the item categories in the CPI index structure.</p> <h2>What goods and services are covered by the CPI?</h2> <p>The BLS classified the average American expenditure and consumption patterns into eight major categories.<br /> <br /> <img alt="" src="/getmedia/a8ab296c-c0f7-4830-a75a-e9f3738c5890/article-what-is-cpi-pie-diagram.webp" /></p> <ol> <li>Housing </li> <li>Food and beverages </li> <li>Transportation </li> <li>Commodities </li> <li>Healthcare </li> <li>Energy prices </li> <li>Education </li> <li>Other expenses</li> </ol> <p><br /> The change in price over time for each category is weighed and averaged to create the CPI data.</p> <h3>How is the CPI calculated?</h3> <p>The BLS enlists the help of price collectors to survey over 80,000 price data from 23,000 retail and service establishments throughout the country. They also monitor over 50,000 housing units to calculate the average price changes in rental properties.<br /> </p> <p>Below is the formula to calculate the annual CPI.</p> <br /> <br /> <strong>Annual CPI = (value of goods and services for the current year/value of goods and services in the previous year) x 100</strong><br /> <br /> Let’s look at an example to visualise it further. The price movements below are for illustrative purposes only, and the figures are oversimplified. Let’s assume that this table is the current total expenditure of an average urban consumer for 2021 and 2022.<br /> <br /> <img alt="" src="/getmedia/677c64a3-9049-4aa7-986f-26f99c025c46/article-what-is-cpi-table-expenditure.webp" /> <p>Below is the formula to calculate the CPI.</p> <img alt="" src="/getmedia/ec721e29-4b2e-4159-8d81-778949e8dd49/article-what-is-cpi-calculation-annual.webp" /><br /> <br /> Given this calculation, the annual <strong>CPI for 2022 is 112.31.</strong> <h2>How is the inflation rate calculated from the CPI report?</h2> <p>Inflation is the rise in prices of goods and services. The rate at which prices increase is called the inflation rate.<br /> <br /> A steady inflation rate is a significant economic indicator symbolising a country’s economic health. High inflation rates mean prices rise rapidly at the expense of the general public’s purchasing power. A low or negative inflation rate, called deflation, is also negative as the economy has become stagnant.<br /> <br /> <a href="/uk/trading-academy/market-events/federal-reserve/">The Federal Reserve</a> aims to keep the inflation rate at 2% in the US. The Fed uses the CPI published monthly by the BLS to measure inflation. Below is the formula to calculate the US inflation rate:<br /> <br /> <strong>Inflation rate = (current CPI – previous CPI) x 100</strong><br /> <br /> Let’s use the example above to illustrate. Let’s assume that the 2021 CPI is 101.4.<br /> <br /> <img alt="" src="/getmedia/e443f689-1573-4297-ac57-af171047ca19/article-what-is-cpi-calculation-inflation.webp" /><br /> <br /> Given this calculation, the inflation rate from 2021 to 2022 is 10.91%. That means the price of consumer goods and services rose by 10.91%.</p> <h2>How does the CPI affect the markets?</h2> <p>The release of CPI data is one of the most anticipated events by traders. It is normal to see volatility in charts before and after the release. However, one thing to note is that traders do not react to the CPI data. Traders react in anticipation of the Federal Reserve’s actions with regard to the CPI report.<br /> <br /> The Federal Reserve looks at the CPI report, the Price Producer Index (PPI), and the Personal Consumption Expenditures (PCE) price index to determine whether they should adjust the current monetary policy.<br /> <br /> The current mandate of the Federal Reserve is to keep inflation at a steady 2%. Suppose the rate falls below or above this level. In that case, the Fed may implement either an expansionary monetary policy, lowering the interest rates to stimulate the economy or a contractionary monetary policy, increasing interest rates to reduce the money supply in circulation.<br /> <br /> To find out how these policies affect the markets, read our article on the <a href="/uk/trading-academy/market-events/federal-reserve/">Federal Reserve</a>.</p>
What is the Federal Reserve and how does it affect the markets?
<p>The Federal Reserve System, or the Fed, is the United States of America’s central bank.<br /> <br /> Following multiple financial panics, most notably the Knickerbocker crisis of 1907, the Fed was created when US President Woodrow Wilson signed the Federal Reserve Act on 23 December 1913. This was to ensure the country’s financial stability and avoid major economic disruptions.<br /> <br /> Since then, the Fed has steered the US economy out of tough times, including the Great Depression of 1929-1933, post-war recessions, the Great Recession of 2008, and the COVID-19 recession.<br /> <br /> <img alt="TFMKT-4495-Image1-2.png" src="/getmedia/f538e20d-be4d-4428-9016-daa8e07a9590/Market-Events_Brief-History-of-the-Federal-reserve.webp" /></p> <h2>Federal Reserve: structure</h2> <p>The Federal Reserve System is made up of four bodies:<br /> </p> <ul> <li>Federal Reserve Board (FRB)</li> <li>Twelve Federal Reserve District Banks</li> <li>Federal Open Market Committee (FOMC)</li> <li>Member banks</li> </ul> <h3>Federal Reserve Board (FRB)</h3> <p>The Federal Reserve Board (FRB) consists of seven members or governors. Their primary duties include overseeing the twelve District Reserve Banks, setting the national monetary policy, and regulating the US banking system. The President of the United States (POTUS) appoints governors for staggered 14-year terms, and a new term starts every two years.</p> <h3>Federal Reserve Banks</h3> <p>The twelve regional Federal Reserve Banks are responsible for regulating banks located in its district.<br /> <br /> <img alt="TFMKT-4495-Image2-1.png" src="/getmedia/2994eece-5759-472e-bcf4-00f74b769ce9/Market-News_Federal-Reserve-District-Banks.webp" title="TFMKT-4495-Image2-1.png" /></p> <h3>Federal Open Market Committee (FOMC)</h3> <p>The Federal Open Market Committee (FOMC) comprises of twelve members: the seven governors of the Federal Reserve Board (FRB) and five presidents of the Federal Reserve District Banks. The list of presidents to join the committee rotates at two- and three-year intervals except for the president of the Federal Reserve Bank of New York, which is a permanent member.</p> <h3>Member banks</h3> <p>Member banks are private institutions that own stock in their regional Federal Reserve bank. All nationally chartered banks in the US are members, such as the Bank of America, Wells Fargo, and Citibank. State-chartered banks may opt to be a member after they follow the conditions set upon by the committee.</p> <h2>Purpose of the Federal Reserve</h2> <p>The Federal Reserve System operates as an independent government body, meaning its decisions don’t need to be ratified to be implemented. According to the US Code section 225a, the Federal Reserve has three primary goals:<br /> </p> <ul> <li>Maximum employment</li> <li>Stable prices</li> <li>Moderated long-term interest rates<br /> </li> </ul> <h2>Setting monetary policy</h2> <p>The Federal Reserve System fulfills its duties by setting and, if necessary, adjusting the US monetary policy. The Federal Open Market Committee (FOMC) meets eight times yearly to decide whether the current monetary policy should be revised. <br /> <br /> It uses three main tools to control the national monetary policy.</p> <h3>Open Market Operations (OMO)</h3> <p>OMO is the buying and selling of government securities, such as US treasury bonds, allowing the Fed to regulate the nation’s money supply. The Fed would buy securities to add money in circulation, lower interest rates, and increase economic activity when the US economy is in crisis. On the other hand, the Fed would sell off securities to reduce the money in circulation, raise interest rates, and decrease economic activity.<br /> <br /> While decreasing economic activity sounds terrible, this is necessary for the Fed to control inflation rates. Inflation happens when prices significantly increase, affecting a consumer’s purchasing power. The Fed aims to keep the US economy at a steady 2% inflation rate.</p> <h3>Bank reserve requirement</h3> <p>The Federal Reserve System requires all depository institutions, banking institutions, credit unions, etc., to have a cash reserve proportional to client deposits. They must keep a certain percentage in reserve, the amount of which is set by the Fed’s Board of Governors, to ensure that clients will be able to withdraw their funds seamlessly.<br /> <br /> For example, if a bank receives a total of USD 1 billion in client deposits and the current requirement is 10%, it must have at least USD 100 million in cash reserves in its vaults or at a regional Federal Reserve bank.<br /> <br /> If a bank falls under the required amount reserve, it borrows from other banks at interest. This interest is called the federal funds rate and is the basis for most interest rates in the country. The Fed uses this to influence interest rates.<br /> <br /> By decreasing the reserve requirement, the Fed allows banks to loan more money to consumers and businesses, thereby reducing interest rates and bolstering economic growth. Conversely, increasing the reserve requirement does the opposite. Banks hold their cash reserves tighter, making it harder for businesses to get a bank loan. This increases interest rates and dampens economic growth.<br /> <br /> An excellent example of the Fed influencing interest rates was during the COVID-19 pandemic. Last March 2020, the Board announced that the reserve requirements would be at 0%. This allowed individuals and businesses to take out bank loans at low-interest rates to tide them over and expand during the pandemic, helping the US economy recover.</p> <h3>Discount rate</h3> <p>The discount rate is the last of the three monetary policy tools.<br /> <br /> Similar to all central banks, the Federal Reserve also acts as a lender-of-last-resort. This means that when banks are experiencing a cash shortfall and there are no other willing lenders, banks can turn to Federal Reserve banks for support.<br /> <br /> The Fed loaning funds to banks is the last option before bank failure. They require a much higher interest rate to discourage banks from borrowing from the Fed directly. The Fed also requires banks to put up collateral against the loan as a security.<br /> <br /> When the Fed increases its discount rate, banks are less likely to undertake risky ventures in fear of high-interest rates. As such, the supply of money in circulation dries up as banks keep their cash in reserve. However, the Fed doing the opposite, pumps money into the economy. Low discount rates give banks the confidence to lend to more individuals and businesses.</p> <h2>The Federal Reserve’s impact on the markets</h2> <p>The Federal Reserve's actions, or lack thereof, significantly impact the markets. As such, traders closely monitor the Fed’s meetings. Even comments from the Board of Governors to the media can create some market volatility.<br /> <br /> The trading community labels the Fed as either hawkish or dovish after a policy is announced. A hawkish Fed, named after the predatory bird, means that the institution is tightening up. For example, the Fed was hawkish for the entirety of 2022. To curb inflation, the Fed announced seven rate hikes, increasing the primary credit rate from almost 0% to 4.5% by the end of the year.<br /> <br /> A dovish Fed, named after the mild bird, means that the Fed will be easing up on policies, lowering rates and allowing the economy to grow. High economic growth increases the employment rate, one of the Fed's primary duties.<br /> <br /> The Federal Reserve adjusting the monetary policy has a massive impact on multiple markets, specifically forex, indices, and stocks. That’s why you will see a lot of movement before and after a Fed meeting, and specific reports are published.<br /> <br /> The Fed goes through many economic indicators before implementing an action. However, trader speculation on Fed movement starts with either of two reports – the <a href="/uk/trading-academy/market-events/what-is-consumer-price-index/">Consumer Price Index (CPI)</a> and the <a href="/uk/trading-academy/market-events/trading-the-non-farm-payroll-nfp-report/">Non-farm Payrolls (NFP)</a>.</p> <h3>Consumer Price Index (CPI)</h3> <p>The US Bureau of Labor Statistics publishes the CPI data every second week of each month. The CPI measures the average change in prices of basic consumer goods and services over a certain period of time. The CPI can quickly give an average of how much the cost of living has changed over time. It is also used as a way to measure inflation.<br /> <br /> If the CPI reading rises, it means that the cost of living for an average consumer increased. On the other hand, if CPI reading declines, then the cost of living has decreased. Take note that the CPI is a weighted average of basic consumer goods and does not represent any individual situation.</p> <h3>Non-farm Payroll (NFP)</h3> <p><a href="/uk/trading-academy/market-events/trading-the-non-farm-payroll-nfp-report/">The NFP</a> is a monthly report by the US Bureau of Labor Statistics on the net change in US employment, excluding farm workers, non-profit organisations, and private household employees. This report is a significant market mover for forex traders. Positive NFP news means the US economy is doing well, bolstering the US dollar against the other currencies.<br /> <br /> A drop in employment usually implies an economic crisis, and the Fed tends to ease up on interest rates to let businesses take out loans and expand.</p> <h2>How the Federal Reserve System affects traders</h2> <p>The Fed tends to have a ripple effect on the markets, specifically forex, stocks, indices, and gold. Let’s take a look at each of the markets and how they are affected by Fed policies.</p> <h3>Forex</h3> <p>When the Federal Reserve raises interest rates, it makes the US dollar more attractive to both local and foreign investors. Bonds and savings accounts yield more interest compared to other assets. The increased demand for the US dollar makes the currency appreciate, and its value rises against other currencies.<br /> <br /> <img alt="TFMKT-4495-Image3.png" src="/getmedia/83e5289c-e94e-41aa-8c17-2ffd28bb1c55/Market-Events_Federal-Reserve-EUR-USD.webp" title="TFMKT-4495-Image3.png" /><br /> <br /> For example, EUR/USD usually drops in price as the US dollar gains more value against the Euro.<br /> <br /> <img alt="TFMKT-4495-Image4.png" src="/getmedia/0c5933f5-d783-43e4-bec1-439da055ef7c/Market-Events_Federal-Reserve-USD-JPY.webp" title="TFMKT-4495-Image4.png" /><br /> <br /> USD/JPY, on the other hand, will rise in price as the US dollar can buy more units of the Japanese yen.<br /> <br /> Conversely, lowering interest rates can depreciate the US dollar as foreign investors turn to other currencies with more attractive interest rates.</p> <h3>Stocks and indices</h3> <p><img alt="TFMKT-4495-Image5.png" src="/getmedia/a79b2691-6f71-4084-b9e4-925d3d802e4b/Market-Events-Federal-Reserve-US-Stock-and-Indices.webp" title="TFMKT-4495-Image5.png" /><br /> <br /> As indices track company stocks, we will group them into one.<br /> The Federal Reserve raising interest rates can create a downward trend for US stocks and indices. The FOMC taking a hawkish stance often ends up with stocks and indices losing significant value.<br /> <br /> Businesses lose access to bank loans which they can use for expansion strategies, while consumers lose access to low-interest rates and thus spend less. Decreased consumption would mean stocks take a hit on their earnings reports which can alarm investors.<br /> <br /> Like the forex market, a decrease in the value of US stocks and indices can benefit foreign stocks and indices.</p> <h3>Gold</h3> <p><img alt="TFMKT-4495-Image6.png" src="/getmedia/30f5d5ef-ccd8-4f8a-8942-84869db215f2/Market-Events-Federal-Reserve-Gold.webp" title="TFMKT-4495-Image6.png" /><br /> <br /> There is an inverse relationship between gold prices and the Fed’s interest rates. Gold loses appeal as a safe-haven, non-interest-yielding asset whenever the Fed increases rates. This pushes gold prices down as investors flock to riskier, more interest-yielding assets such as shares and bonds.<br /> <br /> On the contrary, the Fed lowering rates may make investors worry of an impending economic crisis. They would then turn to gold to protect the value of their wealth, creating a price hike in the spot price of this yellow metal.</p> <h2>Sign up with ThinkMarkets</h2> <p>The Federal Reserve plays a massive role in the global economy. Traders often get anxious whenever they see the Fed making headlines. However, there’s no reason to worry too much if you trade with ThinkMarkets. Here are three reasons why:</p> <h3>A wide range of choices</h3> <p>With a ThinkMarkets Standard account, you can access 4,000+ instruments across multiple markets, including forex, stocks, indices, commodities, cryptocurrencies, ETFs, and futures. This means that you can find instruments that are less likely to be affected by the Fed’s actions.</p> <h3>Go long or short</h3> <p>A rise in interest rates may put downward pressure on US stocks and indices, but as a CFD trader, you can potentially benefit from this outcome by going long or short on instruments. This means that you can take advantage of both falling and rising markets.</p> <h3>Regular market updates and Economic calendar</h3> <p>We have partnered with multiple third parties to provide our clients regular market updates and a global economic calendar. This lets our traders stay up to date with the latest financial news and plan their trades accordingly.<br /> <br /> Trade the Fed report today! </p>
ECB report – What is it and how to trade it
<p><img alt="" src="/getmedia/6b738d63-c9c0-4d06-a170-f512346b3560/article-ecb-report-top-logo.webp" /></p> <h3>What does the ECB stand for?</h3> <p>ECB stands for the European Central Bank and is responsible for conducting and managing the monetary policy of the European Union, the world’s second largest economy after the United States of America. This union is called the eurozone, and currently consists of 19 countries who have adopted the euro as their form of currency. The role of the ECB is to manage the price stability of the euro currency, much like the Federal Reserve (Fed) in the US and the Bank of England (BOE) in the UK.</p> <h3>Who runs the ECB?</h3> <p>After the European Union was formed in 1993, countries within Europe (EU) joined together and adopted one single currency – the euro. Following this, countries within the European Union decided to have one single economic and monetary union that had authority to create and manage a single monetary policy across European countries. In 1999, 11 EU member states’ national banks pooled together and transferred responsibility for their monetary policy to one governing body – resulting in the European Central Bank being born.<br /> <br /> <img alt="" src="/getmedia/a7302412-bf96-450f-8345-186498bbf94e/article-ecb-report-people.webp" /><br /> <br /> The ECB is comprised of a governing council/decision making bodies that includes 6 executive board members, plus local central bank governors. Unlike its counterparts in the US and UK, the ECB needs to work with the national banks of the countries it governs as it’s responsible for such a wide scope of different countries. Therefore, it also offers voting rights with 15 national central bank governors, which are rotated on a monthly basis. The largest countries in the Eurozone – Germany, Italy, France, Spain and the Netherlands – have a slightly higher voting frequency than other countries, due to the size of their economies.</p> <h3>What does it do?</h3> <p>The primary objective of the ECB is to formulate and manage the monetary policy for the European Union, which means ensuring price stability and safeguarding the euro. The ECB is also responsible for maintaining the soundness and safety of the banking system and the solidity of the financial system within the European Union.<br /> <br /> A primary directive the ECB decides on are the key interest rates for the euro area, which are:<br /> <br /> The main refinancing operations (MRO) rate – the interest rate the banks pay when they borrow money from the ECB, it provides the bulk of liquidity to the banking system.<br /> <br /> Deposit facility rate – the rate the banks use when depositing money overnight with a central bank.<br /> <br /> Margin lending facility rate – the rate it costs banks to obtain overnight funds from national central banks.<br /> <br /> By managing the interest rate, the ECB attempts to control inflation and the strength of the euro and the European economy.<br /> <br /> Like any other monetary governing body, its key role is to ensure a stable monetary policy, however, how this is done is different to organisations such as the Fed. If the US economy is struggling, the <a href="/uk/trading-academy/market-events/federal-reserve/">Federal Reserve</a> will influence the price and supply of the dollar by buying and selling government bonds. However, a unique factor of the ECB in comparison with the Fed, is that it is the only institution that can authorise the printing of euro banknotes within the EU. This means it can directly control the amount of euros available to eligible banks; whether that is through printing money or electronically through cash reserves to control inflation and interest rates.<br /> <br /> For example, if the EU starts to experience inflation and prices go up, the ECB can pull euros from the market to soften the pressure. Likewise, if the economy starts experiencing an economic downturn or a declining output, the ECB can step in to provide more money for the economy to revert the effects and avoid a recession.<br /> <br /> Verified banks can then bid for, or request funding at a set interest rate, which they can then loan to the public or businesses to keep the economy moving.</p> <h3>When does the ECB meet?</h3> <p>The governing council meets every two weeks. However, official monetary policy meetings are held every 6 weeks to make monetary decisions and the results are very transparent to the public. The ECB holds a press conference after every policy meeting where members of the governing body speak on behalf of the ECB to discuss any changes or actions taken, and the meeting minutes are also made public.</p> <h5>ECB policy meeting calendar</h5> <img alt="" src="/TMXWebsite/media/TMXWebsite/Articles/article-ecb-report-ecb-calendar.png" /> <h3><br /> How does this affect trading?</h3> <p>The publication of the ECB rate decision is one of the most keenly watched financial events. The outcome affects the markets as it decides the interest rates within the banking system, and effectively how much of the euro money supply is available within the economy. This, in turn, has a ripple effect on the markets. The decision can have a big impact particularly on the forex and stocks markets.<br /> <br /> The ECB rate decision can cause elevated volatility. For example, in the forex market, currency pairs tied to the euro such as EUR/USD can sometimes move by 100 pips. European stocks and indices such as the German index DAX can also see a lot of movement after the announcement.<br /> <br /> This is because the change in interest rates has a direct impact on the accessibility of available capital, which then creates movement in the value of the currency and the euro's purchasing power. With stocks, as the interest rate has a direct impact on business lending and economic growth; it will also see movement, particularly in stocks and indices of banking providers.<br /> <br /> Traders will also speculate on why interest rates rise or fall and try and strategise on what will come in the future. For example, if interest rates rise, this could indicate that the ECB is trying to curb inflation. If inflation is at a high level, this will also affect the markets. Growth tends to slow, there is less consumer spending and the markets – especially the stock market – can become quite volatile.<br /> <br /> The ECB meetings are a key data point to look at when creating a trading strategy, especially if you are trading in European stocks, indices, commodities, or forex.<br /> <br /> Having a strategy is key, and testing this in a simulated market environment could help you to hone your skills.<br /> <br /> Trade the ECB report today! <br /> </p>
What is de-dollarisation and which markets will it affect?
<p>The United States of America and the US dollar have been a pillar of dominance for decades. However, internal problems such as infamous fiscal and monetary policies, plus external pressures from political and economic rivals have exposed the global superpower’s weaknesses. While the USD is still a major player in the forex market, calls for de-dollarisation are making investors anxious about the greenback’s fate.<br /> <br /> In this article, we’ll go through what de-dollarisation is, which markets could be affected, and what it means to traders.</p> <h2>What is de-dollarisation? </h2> <p>De-dollarisation is a global movement by nations to limit the use of the US dollar as the global reserve currency and medium of exchange for international transactions. For example, crude oil exports from Saudi Arabia to China are priced in US dollars. For China to complete the transaction, they need to sell their national currency (Yuan) to purchase US dollars, placing selling pressure on the Chinese Yuan and increasing the value of the US dollar. The idea behind de-dollarisation is to remove the US dollar as the transaction currency of choice and instead deal directly in Chinese Yuan or Saudi Riyal.<br /> <br /> To determine the effects of de-dollarisation, we need to first look at the role of the USD in the global economy. This will also allow us to correctly identify the potential consequences of the dollar’s erosion due to the de-dollarisation movement.</p> <h2>The role of USD in the global economy</h2> <p>The US dollar is considered the world’s reserve currency since 1944. A reserve currency is a foreign currency held by central banks worldwide and used for international transactions such as world trade and global investments. This means that most countries have large dollar reserves, making the US dollar an essential factor in a nation’s economy. The prominence of the US dollar in global reserves is significant; as of 2021, the dollar constituted approximately 59% of the world's allocated foreign exchange reserves, according to the International Monetary Fund (IMF).<br /> <br /> <img alt="" src="/getmedia/8e9952fd-b426-4698-b647-44e5e5584e9a/Market-Events_De-Dollarization_USD-as-invoicing-currency.webp" /><br /> The US dollar is also the world’s most used invoicing currency. An invoicing currency is the currency used for international transactions. A country must first exchange its local currency for USD to trade with another country.<br /> <br /> As per our example above, if Japan wants to buy metals from Australia, it cannot use yen to pay. It must first exchange yen for the US dollar. The US dollar's dominance in international trade, particularly in transactions involving countries like Japan and Australia, is highlighted by its role in Australian exports. According to the Australian Bureau of Statistics, between 2015-16 and 2020-21, the proportion of Australian merchandise exports invoiced in US dollars (USD) increased by 6.3 percentage points to 87.8%, while those invoiced in Australian dollars (AUD) decreased to 9.9%.<br /> <br /> Also, according to Eurostat, in 2020, 48.1% of all goods and 79.95% of petroleum and petroleum-related products imported into the EU from non-member countries were invoiced in US dollars.</p> <h2>How did the USD become the international reserve currency?</h2> <p>The US dollar hasn’t always been recognised as the global reserve currency. The Greek drachma, Roman denari, Venetian ducat, the Spanish silver dollar, and the UK pound sterling are some previously globally recognised currencies. The reason for these currencies being able to dominate during their time is because each empire’s currency dominated the world economy and culture at their respective time.<br /> <br /> When other countries or people traded with these empires, they often retained the profits they generated in the empire's currency rather than exchanging them.<br /> <br /> By the end of World War 2, the US was virtually unscathed, helping it become the world’s biggest economy - generating roughly 50% of the world's GDP. Even today, most of the world’s biggest firms are US-based, and they demand payment in US dollars. Only 4 out of the 20 biggest firms by market cap (in late 2023) were not from the USA.<br /> <br /> <img alt="" src="/getmedia/2c737168-ea20-4818-a757-d0cf39bcc07e/Market-Events_De-Dollarization_previous-global-currencies.webp" /><br /> Source: <a href="https://www.whytes.ie" target="_blank">https://www.whytes.ie</a><br /> <br /> But there are also more direct reasons why the US dollar is today’s main reserve currency. In 1944, with the global economy recovering from the war, 44 Allied nations met to create the Bretton Woods system. This agreement involved countries like the United States, Canada, Western European countries, Australia, and Japan. This required them to peg their currencies to the US dollar. For these countries to peg their currency to the US dollar they needed to hold USD, in order to be able to supply their local banks and users.<br /> <br /> The dollar itself was convertible into gold at USD 35 per troy ounce. This system, however, was not a traditional gold standard where all currencies were valued in gold, but rather a fixed exchange rate system with the dollar as a central reference.<br /> <br /> On August 15, 1971, US President Richard Nixon ended the dollar's convertibility into gold, marking a shift to fiat currencies, which are government-issued and not backed by physical commodities. This move prompted a gradual shift from fixed exchange rates to floating rates, where market forces determine the value of currencies.<br /> <br /> Despite these changes, the US dollar remained the world's primary reserve currency, maintaining its pivotal role in international finance and trade.</p> <h2>Why are there calls for de-dollarisation?</h2> <p>The global movement for de-dollarisation is led mainly by world leaders and business figures who are alarmed by the power that the US holds over world trade. Even a single rate hike by the Federal Reserve can plunge the global markets into chaos, with other currencies also feeling the effect.<br /> <br /> Security concerns are also behind the de-dollarisation movement. Russia, for instance, has actively called out the US Treasury for weaponising the US dollar against non-allies. These statements come after the United States and over 30 allies and partners imposed heavy sanctions on Russia in response to its unprovoked invasion of Ukraine, squeezing Russia’s foreign exchange reserves.<br /> <br /> One notable organisation that has been making waves towards de-dollarisation is BRICS, an intergovernmental alliance between emerging superpowers Brazil, Russia, India, China, and South Africa. BRICS have entered into bilateral trade agreements with each other and their respective central banks to reduce their dollar reserves and rely more on local currencies.<br /> <br /> <img alt="" src="/getmedia/3b40d2d7-89e1-4820-a67f-e40c94047b00/Market-Events_De-Dollarization_flags.webp" /><br /> For example, China and Brazil made headlines on 29 March 2023 when they announced that they would stop using the US dollar as an intermediary currency when trading. This could serve a massive blow to the US dollar as China is one of its biggest rivals for the global market share. At the same time, Brazil is the biggest economy in Latin America. Russia and India followed suit, using Russian rubles and Indian rupees in international trade.<br /> <br /> There are also talks of BRICS establishing a common currency to take over the USD as the global reserve currency. Historically speaking, there have been multiple attempts to replace the USD, but none has come close to success. There are a lot of challenges that BRICS, or any other organisation, will face before they can effectively replace the US dollar.</p> <h2>What is the data telling us?</h2> <p>The global shift from the US dollar as the dominant reserve currency is a gradual process. In 1999, approximately 71% of international reserves were held in USD, which declined to about 59% by 2021. This trend indicates a gradual de-dollarisation, although the US dollar still plays a significant role in the global economy.<br /> <br /> Several factors are contributing to the continued dominance of the US dollar. One of the primary reasons is the prevalence of US firms in international markets, with many requiring payments in USD. Additionally, the depth and sophistication of the US financial markets, alongside robust commodity trading infrastructures, make the dollar a preferable option.<br /> <br /> Other significant currencies face challenges that hinder their potential as viable alternatives to the USD. For instance, China's currency, the Renminbi, is not fully convertible due to solid capital controls, and the currency itself is not free-floating. Moreover, doing business in China is hampered by legal, political, and language barriers. With Russia, due to its involvement in the Ukraine conflict, is notably ostracised from international financial systems.<br /> <br /> Whereas Brazil and South Africa, face high inflation and economic volatility, and are also unlikely candidates for reserve currency status. Japan's Yen, while a significant currency, is less appealing due to the heavy involvement of its central bank in the bond market, leading to days with minimal trading activity in the Japanese treasury market, which undermines its attractiveness as a haven for savings.<br /> <br /> As for the Indian Rupee, it's not widely considered a potential reserve currency due to several reasons:<br /> </p> <ol> <li>While a large and growing economy, it still needs the scale and global financial integration comparable to economies like the US or the Eurozone. The depth and liquidity of India's financial markets are also relatively limited compared to these economies.</li> <br /> <li>The Indian Rupee is not a fully convertible currency, which is a fundamental requirement for a reserve currency. India also faces fiscal deficits, inflation, and regulatory uncertainties that could deter international investors.</li> <br /> <li>The Indian economy is still developing, with significant parts relying on informal sectors, which adds to the unpredictability and risk factors associated with the Rupee.</li> </ol> <p>For a currency to be a reserve currency, there needs to be immense trust and stability associated with it, which currently, the Indian Rupee does not universally command.<br /> <br /> The Euro has also been touted as a possible reserve currency. Yet, just a few years ago, there were talks of Greece leaving the Euro, and with more anti-EU parties gaining prominance in Europe, investors are unlikely to want to hold a currency that could potentially disintegrate. With the EU economic area also slowing down and an ageing population, it doesn’t look like a viable reserve currency.<br /> <br /> Looking towards the future, it is natural to assume that China will become the next leader, given its size. According to the World Population Prospects 2022, published by the United Nations Population Division, China is projected to have a population of 771.3 million by 2100, while the United States is projected to have a population of 393.9 million by 2100.<br /> <br /> If the average Chinese resident earned the same as the average US resident, the Chinese economy would be 1.95 times bigger than the US economy – making China an obvious reserve currency candidate. Yet, as mentioned above, many changes are required before that can happen. And maybe the most significant change required is for them to turn into a democracy, something that is not likely any time soon.</p> <p> </p> <h2>Effects of de-dollarisation in the global markets</h2> <p>With the dollar being so widely interlinked with the global markets, the continuation of the de-dollarisation movement and any moves within it could increase market volatility on a global scale. Here are some of the potential effects of de-dollarisation on the global markets:</p> <h3>Forex</h3> <p>The biggest risk of de-dollarisation is that the value of the USD drops in value as people sell the USD and move into other currencies. A lower-valued USD would also increase inflation in the USA and, in the worst case, create a catastrophic situation if confidence is lost, as the US would be spending more than it earns. Borrowing as a percentage of GDP is 103.4%.<br /> <br /> <img alt="" src="/getmedia/93b74b1a-d874-49fd-9c58-a9bd68cdf600/Market-Events_De-Dollarization_forex.webp" /><br /> In 2022, the Euro was the second biggest currency reserve held at roughly 20.5% and likely the short-term winner.<br /> <br /> In the long run, and following changes to their capital control and economy, the Chinese yuan is a likely winner.</p> <h3>Cryptocurrencies</h3> <p><img alt="" src="/getmedia/f90f6298-340a-4f51-89f9-7a68097b24bd/Market-Events_De-Dollarization_cryptocurrencies.webp" /><br /> Cryptocurrencies emerge from the belief that traditional fiat currencies are flawed and that governments often exert excessive control over individual finances. This viewpoint gains momentum in scenarios where high inflation occurs or government actions restrict financial freedom, such as imposing a €10,000 limit on cash transactions in the EU or the financial controls seen in Cyprus. Cryptocurrencies are often touted as a solution in these contexts, offering an alternative to government-regulated monetary systems.<br /> <br /> Amidst these developments, the cryptocurrency market is regaining attention as a viable investment option. Major cryptocurrencies like Bitcoin and Ethereum have shown resilience and growth as they gain acceptance among more institutions as possible alternatives to fiat currencies.</p> <h3>Stocks</h3> <p><img alt="" src="/getmedia/5dea3aff-0ac3-4fda-88f5-763eff5430ad/Market-Events_De-Dollarization_stocks.webp" /><br /> The US stock market has strong relations to the dollar but it’s not as straightforward as you might think. Some companies would rather have the dollar depreciate than appreciate. Let’s look at the two scenarios.<br /> <br /> When the dollar appreciates, US companies that import raw materials, energy or commodities to manufacture goods and services will feel the blow on their balance sheets. If de-dollarisation continues, the purchasing power of the dollar decreases. This means manufacturers will have to spend more to buy the same amount of materials, putting significant pressure on profit margins.<br /> <br /> Stocks and indices tracking companies that publish worse-than-expected earnings reports often find themselves in a downward trend.<br /> <br /> On the other hand, if the dollar depreciates, US companies that export goods and services will fare better. The inflow of foreign currencies traded against a weaker dollar will mean companies have higher profit margins. At the same time, American goods and services will become more affordable in the global market, creating massive appeal for US products.<br /> <br /> Check out how to trade stocks with CFDs <a href="/uk/trading-academy/cfds/how-does-cfd-trading-work/">here</a>.</p> <h3>Gold</h3> <p><img alt="" src="/getmedia/d0d287eb-90b1-4fd9-a24f-a301e9db3711/Market-Events_De-Dollarization_Gold.webp" /><br /> The potential political and economic fallout from de-dollarisation will likely push anxious investors to turn to gold for protection. Gold bugs have for years been using the high US spending and inflation as a reason to get more people to buy gold.<br /> <br /> Also, seen as a safe-haven asset, gold shines the most during a crisis. Should nations completely abandon the greenback, it’s safe to say that there will be a window where gold rises in value before investors embrace the USD’s replacement.<br /> <br /> The decreased dependence on the US dollar will significantly impact the financial markets, presenting CFD traders with various opportunities to go long or short on various instruments.</p>
Foreign policy and forex: how US presidential elections influence global currency markets
<p>Every four years, the United States gears up for its presidential elections, with the whole world waiting in baited anticipation. Traders and investors across the globe closely monitor campaign trails, proposed policies, and public polls, not just for political curiosity, but for clues on how the elections and its eventual winner would affect the global financial markets.<br /> <br /> As the President of the United States, whoever wins can reshape the global economic landscape opening up opportunities for traders. In this article, we’ll go through how US presidential elections can influence the forex market.<br /> <br /> US foreign policy decisions, often significantly influenced by the outcome of presidential elections, can have far-reaching effects on global economic relations, trade agreements, and geopolitical stability. These factors collectively play a crucial role in defining the strength and movement of major currencies, including the US dollar.<br /> <br /> For forex traders, it is extremely important to stay up to date with the news during election years. Historically speaking, the run-up towards the US elections have led to major price swings in currency pairs, such as EUR/USD, GBP/USD, and USD/JPY.</p> <h2>Historical impact of the US presidential elections on forex pairs</h2> <p>While historical data is not a sure guarantee that the market will move the same way, it is likely that prior circumstances will cause the same price movements. It’s important to note that the price movements of currency pairs are caused by the accumulation of a multitude of factors, with the US presidential elections being one of the major reasons.<br /> <br /> Using EUR/USD and USD/JPY as examples, we’ll look at the price movements in November 2016 and 2020, the pivotal month of the US presidential elections.</p> <h2>EUR/USD 2016</h2> <p>This pair often reacts to shifts in US-EU relations. Trade policies that lean towards protectionism or changes in NATO funding have historically caused volatility. Public sentiment on the candidate that’s favoured to win, and their policies have led to fluctuations in this pair as traders speculated on the future of US-EU economic relations.<br /> <br /> <img alt="" src="/getmedia/037fbef6-8aa1-459e-803c-53ea783ca2df/market-events-fereign-policy-and-forex-chart-article-image.jpg" /></p> <p>November 1-30, 2016</p> <p>Let’s look at the price movements of EUR/USD in November 2016, when Donald Trump won with 304 votes as opposed to the 227 votes for the Democrat Hillary Clinton. The price of EUR/USD slipped from 1.1292 to 1.0515, showing a massive 7.4% decrease.<br /> <br /> Following Trump's victory over Clinton, there was an immediate weakening of the Euro and a strengthening of the US dollar. This can be attributed to various factors influenced by the election results, such as: </p> <ul> <li>Trump's victory added to the political uncertainty in the Eurozone. This uncertainty was expected to slow Eurozone growth and complicate the job of the European Central Bank (ECB), thereby undermining the Euro</li> <li>Trump's fiscal stimulus agenda, which proposed increasing government spending and significant tax cuts, particularly reducing corporate tax rates, was expected to alter the competitiveness of American businesses</li> <li>Trump's pledge to implement tariffs on imports was likely to lower the volume of imports into the US, supporting the US dollar’s strength. Additionally, any reduction in immigration could impact remittances abroad</li> <li>With Trump’s victory, experts expected the Fed to take a hawkish stance and hike interest rates in December 2016</li> </ul> <p> </p> <h2>EUR/USD 2020</h2> <p><br /> <img alt="" src="/getmedia/784d6b87-ae2d-44b4-999d-fbe3fa37240f/market-events-fereign-policy-and-forex-chart2-article-image.jpg" /></p> <p>November 1 – 30, 2020</p> <p>In November 2020, Joseph Biden Jr. won the quadrennial presidential election. Biden's in the 2020 US presidential election was seen as a positive development for emerging markets and led to a weakening of the US dollar against these currencies. The market's reaction was influenced by expectations of normalised trade policies, improved global growth prospects, and uncertainties regarding future fiscal policies in the US.<br /> <br /> In the span of 5 weeks, the price of EUR/USD rose by 4.87%, from 1.1602 to 1.2167. Several reasons caused this reaction, including the factors below:</p> <ul> <li>The clarity that emerged with Biden's win improved global market sentiment. There were high expectations of US foreign policy and trade relations stabilising, easing tensions and boosting global economy. Wall Street had a strong performance during this period, marking its best week since early April at the time</li> <li>Biden's presidency was anticipated to mark a significant shift from the Trump administration's approach, especially in terms of foreign policy and trade relations. The prospect of a cooldown in trade tensions, particularly with China, was viewed positively by the markets</li> <li>The anticipation of reduced trade tensions under Biden's administration led to increased capital flow back into emerging markets. The MSCI Emerging Markets Index (EEM), for instance, closed at its highest point in over two years </li> <li>Biden's win raised expectations for fiscal stimulus, which was passed to support economic recovery in the US</li> </ul> <h2>USD/JPY 2016</h2> <p><br /> <img alt="" src="/getmedia/ad99ea26-7bf7-44ea-ae13-11618e18ec0f/market-events-fereign-policy-and-forex-chart3-article-image.jpg" /><br /> <br /> In November 2016, USD/JPY rose from 101.75 to 118.691, recording a massive 17.31% jump in just one month. This major rise could be attributed to several factors, although experts note that Donald Trump’s victory was a key driver. Here are some reasons why the USD was expected to strengthen following Trump’s win:</p> <ul> <li>Trump’s proposed policies during the 2016 debates were considered more likely to lead to fiscal expansion, higher inflation, and potentially more aggressive interest rate hikes by the Federal Reserve</li> <li>Trump's promises of significant infrastructure spending, tax cuts, and deregulation raised expectations of accelerated economic growth and higher inflation in the US</li> <li>The Federal Reserve was already on a path to tightening monetary policy in November 2016, whereas the Bank of Japan maintained an ultra-loose monetary policy to combat deflation</li> <li>The Japanese yen is often sought as a safe-haven asset in times of market uncertainty and turmoil. The initial reaction to Trump's win was uncertainty, but as markets began to focus on his pro-growth policies, there was a shift in sentiment that favoured riskier assets, leading to a decrease in demand for the yen</li> <li>As global markets absorbed the potential impacts of Trump's victory, there was a shift towards riskier investments. This change in sentiment often leads to reduced demand for safe-haven currencies like the yen and gold (XAUUSD)</li> <li>Trump’s critical stance on trade agreements and potential changes to global trade policies created expectations of a stronger US economy, further supporting the dollar against the yen</li> </ul> <h2>USD/JPY 2020</h2> <p><img alt="" src="/getmedia/fdc90066-bc01-46d0-9efa-c49fc0cfbdba/market-events-fereign-policy-and-forex-chart4-article-image.jpg" /><br /> <br /> Joe Biden’s victory in 2020 caused a rise in the price of USD/JPY. This is primarily due to investors expecting an easing of trade tensions, encouraging riskier investments. Safe haven assets, such as the Japanese yen, were sidelined for high interest yielding assets.</p> <h2>Trading the US elections with ThinkMarkets</h2> <p>The US election opens a wide range of opportunities for traders. Whether you’re trading forex pairs, commodities, stocks, indices, or even futures, it’s important to rely on a data-driven strategy for better results.<br /> <br /> This is where ThinkMarkets comes in. We provide our traders with access to an extensive library of guides and feature-rich platforms designed to boost your trading.<br /> <br /> Stay ahead of the curve and create an account today!<br /> <br /> <i>Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.</i></p>