The construction spending report is importance because it makes up about 20% of the GNP economic report. Though it seems that it should be of paramount importance especially if it’s making up 20% of the GNP ,the truth of the matter is that since it comes nearly last in the economic calendar, the market has already reacted to some other 14 economic reports.

Stocks favor a strong payroll report as it’s an indicator of a strengthening economy and favourable outlooks for shareholders who might expect more sales and possibly profits. However, if unemployment is up, this might be a sign of a waning economy and so stocks may fall.

Bonds will generally fall if payroll employment is stronger than expected. This may be a sign of a stronger economy which may lead to higher interest rates ,leading to lower bond prices. If unemployment is up ,this might lead to a possible recession meaning lower interest rates , and higher bond prices.

For the dollar currency trader, the same applies as with stocks. Essentially, if the economy is expanding, other nations will bid up the price of dollars to buy US goods and services. However if unemployment figures are up, this leads to lower interest rates and thus lower dollar prices as is case now.

New home sales are broken down into four USA regions: South,Northeast, Midwest, and the West.The data can be very volatile, partly because contracts may fall through prior to closing; so the forex and currency markets do not weigh this report too heavily. The caveat here is unless the number is a huge surprise.

However for those interested in the GNP report, this can be more important than existing home sales. The reason for this is that when one buys an existing home, one is not adding to the GNP. When one buys an existing home, one is just swapping an asset with another person and not adding to the GNP.

The Dollar favors a good GNP report. This is simply because a growing US economy means that other countries are buying and demanding US based goods and services and the economy is robust. By buying US goods and services it means that they are demanding more of the US dollar to be able to buy those goods and services and the dollar would probably appreciate in value. The only thing to note is that if it is viewed that the report is too strong , then there might be signs of inflation and that would lead to a fall in the value of the dollar .

Stocks will generally rise with a favourable GNP report as it means that the economy is growing and would probably mean increased profits for firms and their shareholders. As noted above , as long as the GNP report does not show signs of inflation, then stocks and the market indexes are likely to rise.

For bonds it is important to note that bonds normally favour negative economic reports. If the economy is sluggish or not doing well, it usually means that interest rates will fall and bond prices will rise. As such if the GNP is rising showing that the economy is doing well , corporations will probably borrow more and thus cause interest rates to rise and the bond prices are likely to fall .

The biggest misconception most traders have when trading this index is looking for absolute numbers. Most big investment firms already have an idea of what the CPI is before it is release and are only looking for confirmation on it’s release date. Expectations are what a trader should use to trade this economic indicator.

How the CPI affects the dollar

Stocks and Bonds will usually sell off on a higher than expected CPI report.Since CPI is trying to measure inflation, and if prices are rising faster than expected, consumer purchasing power is diminished, so they may buy fewer goods. This causes company revenues to fall which is reflected in Stock prices.

A good example of this is today’s 148 point stock plunge where the market was worried that there is an ease in inflation in the near term and further confirmed by poor forecasts by Home Depot and Sears and home builder D.R. Horton. Dollar Tumbles

As for the dollar , again there are two possible results

1. Usually a percieved higher inflation especially now that the Feds chairman doesn’t sound too confident otherwise, will be viewed negatively and cause the dollar to fall.This is because the dollar’s purchasing power is diminished compared to other currency.
2. The other scenario is that though their is higher inflation, if investors think there is going to be a short term rate hike, they may bid up the price of the dollar to take advantage of the higher yields.

At the current market what you as the currency trader should be looking for is any sign that the Feds might raise the interest rates .If they continue talking double speak as they are right now ,then you may be right to assume that there is unexpected inflation and the value of the dollar will continue dropping as it currently is and further stock price drops unless the CPI changes direction or slows down.

For stocks higher inflation may cause consumers to buy less ,which leads to less goods sold and probably lead to decreased profits. At the same time ,the value any stock is the present value of future expected cash flows. With higher interest rates ,this will decrease the present value of stocks

For bonds, consumers will demand a higher inflation premium to cover the inflation rate thus reduce the bond prices.

For the dollar it is important to be more prudent. There are 2 possible scenarios

1. If interest rates are percieved to be rising ( without a fear of inflation) then it is possible for the dollar to strengthen relative to other foreign currencies. This is because foreign investors will sell their currency and purchase dollars to invest in the higher interest rates. This relative to the currencies being judged against the dollar, may cause the foreign currency to fall and the US dollar to rise.
2. If inflation is imminent ,the purchasing power of the dollar is reduced and as such the value falls.

The rule of thumb when using economic indicators is based on the Phillips curve. Basically as unemployment drops, inflation tends to increase and vice versa. The trader is trying to figure out which is rising, unemployment or inflation.

It is important to interpret what is happening with each currency you are trading in especially if you are holding long term positions.Note too that each and every currency you are trading is also affected by this and also their own countries reports. That is the reason why just because the dollar is strong to the Canadian does not automatically mean that it is strong the Yen too.

We shall discuss what each and every indicator above means to each individual trader later in this series.

1. Predicting Market Response.

I don’t know how to say this. Unless I am a prophet, I really don’t know where a particular foreign currency is going to .Actually no one does. It is not foolhardy to think that since you know the next unemployment report number which you got from the latest news provider faster than anyone else in the world, you are now ready to kill the forex market. The forex market is like water, it finds it’s own level and will do what it wants to do.

The forex market will probably do what it wants to do. Lets take the recent example where the USA securities market was falling. Normally ,if US stocks are falling, you would expect the eur/usd to be following suit. However the losing trader is the one who did not know that the Japanese market was falling at a faster rate. Always remember that the market will do what it wants and not what you think it will do.

2. Market Trends

Whatever you do in trading, don’t ever trade against the prevailing trend. However getting caught up with news trading at 8:30am on Friday will not allow you to trade with the trend. A trend is in place for a reason. Most of the time ,you being a retail forex trader,you will never know the reason. However, placing those moving averages ,trend lines and channels in your chart will save you a pretty penny.

Contrary to popular belief, trends are not easily broken. So why trade against them? It is always the broke trader who screams ,I did not follow the trend. Find your own techniques on trend trading and stick by them.

3. Market Spikes

If you have traded forex for more than a month, you have been caught in a spike. It will happen sooner or later and it’s part of the trading game. Disciplined traders don’t mind spikes as they have proper money management and also know that sooner or later a spike will be in their favor .As such spikes can’t make you broke .

However if you are busy trading the news ,spikes will make you broke very quickly. Spikes are the main reason that made me stop trading the news. In my wisdom I “knew” that the gbpjpy was going to move up because of a certain tip I had received from a “forex guru” . Needless to say I found out in 2 minutes that the market can spike up 200 pips and down 200 pips then up 100 pips in less than a minute. All this time ,my stops hit and the forex broker inputting his own prices. Yes I have lost 500 pips in a trading bar. My view is so will you if you continue trading the news.

4. You Know Nothing.

The Reuters News feed will not give you news before your broker. Neither will you have privy to forex fundamental secrets that no one else knows just because you have the fastest news service. What makes the retail forex trader think that they know more than a battery of economists and forex analysts who have phd’s and all they do is try and figure out what it means when less people bought margarine last month? Trust me those guys exist. By the time the fundamental news is coming on Friday, these guys had already assumed where the market was going to go. So ask yourself a very simple question. What makes you think you know more than these big firms?

Think about this scenario. An analyst finds out some new information about the Japanese export numbers .He reports this to Reuters and then Reuters sends it out. You would be a fool to think that no one else knew about that story before you.My advice ,if you know something you think no one else knows, confirm it with technical analysis.

5. Gambling in Forex

If you want to lose money in forex, then treat forex like a get rich quick scheme. You will probably have noticed how hard it is for you to trade in comfort when trading forex news you don’t understand. You start sweating and staring at those charts every tick. You find yourself moving from an hour chart to a 5 min chart to a 10 sec chart ( I laughed when I had that one) . If you find yourself confirming a trade after you have placed it, you were gambling. You should be able to know what to trade, how much to risk ,how much you might gain and trade expectations before you place the trade.