Investors should look to the political agenda to learn what sways the financial markets, says Giles Coghlan, Chief Currency Analyst, HYCM
From central bank statements, to COVID-19 press conferences and even Elon Musk’s tweets – all sorts of announcements can have a significant impact on investment markets. Indeed, most traders will be acutely aware of this.
It is particularly true in the current climate. Economic outlooks globally are still largely at the mercy of vaccine rollouts, the threat of the delta variant, and any developments with the pandemic situation more broadly. As such, traders would do well to factor in the political agenda before making any bold moves.
So, why is this? When it comes to central bank statements, traders can gain a lot of insight from just taking a glance at the language used within these publications. Such documents provide a glimpse into national economies, as well as the opportunity to hear about any changes in perspective straight from the horse’s mouth.
That said, central bank statements can instill fear into some people. They can seem complex and shrouded in opaque language. However, if you know what to look for, they are a valuable weapon in an investor’s armoury.
With this in mind, what should traders and investors bear in mind when getting to grips with market fundamentals, and the key political events that sway the financial markets?
Central bank statements
As I have already noted, central bank statements and monetary policy should be the first port of call for investors looking to boost their knowledge around why the market might be moving in a certain direction. This can be complicated work; however, the process can be made simpler by focusing on the core indicators that the central bank has identified. These are production, employment, growth, and inflation.
The most important area here for investors to pay attention to is inflation, which concerns the cost of goods and services, and while all banks tend to set their own policy, the target rate or band tends to be set at around 2%.
Similarly, the subject of interest rates should also be monitored closely by traders and investors. The setting of the base interest rate can have a huge impact on the value of currencies – indeed, even the smallest intimation that interest rates might change can prompt a spell of market volatility. It stands to reason that when rates rise, traders and investors can interpret this as a sign of market confidence, economic growth, or a bid to control levels of high inflation.
In turn, as traders and investors want to put their weight behind a currency that is backed by a strong economy, this sentiment tends to increase the demand for the local currency. Likewise, another reason that an increase in interest rates tends to be accompanied by a surge in a particular currency is the fact that investors can potentially obtain a higher yield from an investment with the bank.
Gaining a ‘gut feel’ for monetary policy
Many might think that central banks and the economy at large are still swathed in mystery – but the truth is that central banks commit to publishing the minutes of their meetings to enhance transparency and manage market expectations. The end result being more effective monetary policy.
From here, it makes sense that some traders might think that following a concise bullet-point analysis would provide them with all the information they need to go about their investment or trading activities. However, I would advise against this, as a lot can be missed out in these summaries.
As with many other things in life, the devil is in the detail, and the better acquainted traders become with these statements, the more they will realise that a particular phrase from a key figure, or a deviation from their usual outlook, can often be enough to completely throw the markets off. Likewise, news moves currencies, and traders should pay attention to any data released (for example, employment statistics), to get a good read on market sentiment.
As traders react to any emphatic statements, currencies will often move – take, for example, recent comments from the Bank of England’s Dr Gertjan Vlieghe in June, which took a more hawkish tone than usual. The key phrase to note here was Vlieghe’s assertion that he expected the UK to transition out of the furlough scheme more smoothly than expected, and as such, an earlier interest rate rise would be appropriate – a far cry from his typically more neutral perspective. Following these comments, it was no surprise to see that there was a strong run higher in GBP, as investors reacted to the more bullish case set forward by Vlieghe.
Cases like this are relatively common. It is why central bank statements must be circled in the diaries of investors and traders. Similarly, the latest RBNZ rate decision on June 14 caused the central bank to note a sudden shift in policy. In this instance, the RBNZ surprised markets and announced that they were stopping all asset purchases on June 23. The NZD has been given a strong buy bias over the next few days due to this policy shift.
Ultimately, there is much to learned from reading these documents in full, although it might seem like a difficult task at first. Generally, over time traders will develop a ‘gut feel’, which should give them a valuable grounding when making financial decisions.
[Main image: priscilla-du-preez–unsplash]
