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Do You Trust Forecasts in Economic Calendars?

July 1, 2019 by

About one third of this blog’s readers use economic calendars in their trading. Forex traders use calendars for many reasons — avoiding high-volatility market periods, keeping up with fundamental situation, high-impact news trading, or just out of curiosity. Each calendar provides a list of events, which are normally some economic indicators, with the Actual, Previous, and Forecast values provided for each indicator. Generally, if the Actual value deviates significantly from the Forecast value, the related currency pairs experience a strong price movement. However, there are three ways a trader can use calendar’s Forecast values in trading.

  • Direct — the most obvious way is to use the forecast as a direct hint of how the indicator will come out and thus how the affected currency will fare. For example, if the median forecast for the upcoming US NFP report is very positive, you proceed to buy the USD vs. other currencies as soon as you learn about the forecast. You might even close the trade right before the news release — this doesn’t really matter. Such approach allows earning from news forecasts simply by following them.
  • Contrarian — a direct opposite of the previous method of reacting to the Forex calendars’ forecasts is to act against them. For example, the first estimate for the quarterly US GDP is due in two weeks; the forecast at your favorite calendar is dismal — the growth is expected to stall. If one were to act according to such a forecast, it would be logical to buy EUR/USD, however, you are using a contrarian method, and short EUR/USD instead. You may keep the trade through the actual GDP announcement or close it prematurely, but the important bit is that you keep a position, which is aimed against the prevailing forecast. Considering low actual accuracy of economic forecasts, this looks like a sound trading idea.
  • Reaction — a completely different approach to calendar forecasts is to buy or sell a currency pair depending on how different the Actual value turned out compared to the Forecast value. For example, the initial jobless claims forecast was at 300k; the Department of Labor reported 250k claims instead; you sell EUR/USD in anticipation of medium-term strengthening of the US dollar. The apparent advantage here is that you only act on clearly favorable setups, while a huge disadvantage is that you cannot react as fast as institutional algorithms do in such situations — your only hope is for the currency’s newly revealed strength or weakness to persist for hours, not seconds.

My own view on forecasts presented by FX calendars is rather pessimistic. I would divide such forecasts into two groups:

  • Accurate but useless — some economic indicators, like GDP, employment rates, inflation, are predicted rather accurately without huge deviations. This makes the forecasts provided by the calendars, on the one hand, rather reliable, but, on the other hand, unusable — there is rarely any surprise or influence from such forecasts.
  • Inaccurate and still useless — other economic indicators are difficult to predict, like confidence/sentiment indices, nonfarm payrolls, retail sales. This makes the forecasts not only unreliable but also essentially meaningless as market participants simply ignore them.

Huge forecast miss in economic calendar for nonfarm payrolls doesn't affect anything. Oh well...

And what is your opinion on them?

Do you use forecasts provided by FX calendars?

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If you want to share some details about how you use calendar forecasts or if you want to ask some questions about Forex calendars in general, please feel free to submit them using the commentary form below.

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