The traditional relationship between equity markets and forex is complex and often not particularly well correlated. As a result company earnings are often of little interest to Forex traders. However, this earnings season may be different.
Theoretically, if a country’s equity markets perform well, as the US market has done year to date, then this creates confidence, attracts foreign investors and results in demand for the local currency (and of course vice versa).
Companies in the US report quarterly (unlike Australia where most report 6 monthly), and most of these reports are released within a 2-3 week timeframe creating a so called ‘earnings season’.
There is no time that influences equity market sentiment and share pricing more than this.
So, logically US earnings season may generally influence USD pairs.
However, this earnings season, which started last week, may have additional significance beyond the norm.
Clearly one of the major market areas of interest is the “will they-wont they” debates about whether the US Federal reserve will cut interest rates when it meets next.
Under normal market conditions the “Fed” primarily considers jobs data and inflation (CPI) in its decision-making relating to interest rate decisions.
However, with the latest job numbers beating expectations significantly together with concerns from trade wars, Chinese growth slow down and European weakness, they are looking beyond the more traditional “measures” to determine when, and by how much, any rate cut is merited.
A strong company earnings season in the US (both in terms of revenue and projected performance) may now be part of the equation to fulfil their mandate. Of course, this goes beyond the performance of individual companies, rather a broad measure of hits/misses both retrospectively and prospectively is what may become part of their decision-making.
The relationship between interest rate decisions and currency movements is obvious to all, hence with the potential part that earnings reports may play in such a decision, this time makes this season of great interest.
It is worth pointing out that the reason for developing awareness of this is not to encourage prediction of what the Fed may do, rather to suggest that this awareness may help in terms of identifying potential risks to what the market has or has not already priced in to currency pairs.
We will be discussing the interplay of information and how it may influence all financial instruments in the next Inner Circle session. It would be great to see you there on the LIVE webinar. Find out more by clicking here
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