How to Master Macroeconomic Analysis as a Trader

As a trader who has been in this business for years, We have seen it all:

  • the stocks collapsed in 2008/9
  • 2010's flash crash
  • the rally that followed the crisis
  • Covid's pandemic

In all this, from a broad perspective, there are two major reasons why financial assets move up and down. There are fundamental factors like the economic growth and jobs numbers and there are technical reasons.

How do you as a trader perfect the art of doing quality macroeconomic analysis?

Historical details

The first thing you need to do is to look at the bigger picture. In this, you should always start a macroeconomic analysis from the top. For example, if you want to do a good analysis about the American economy, you should start by looking at the historical growth of the country. By looking at the historical growth, you will be at a better place to understand the current happenings.

In this, you should consider reading books and opinions about the economy, its components, and the key challenges the country has faced.

Current economic situation

After reading the historical details, you should now consider looking at the country’s current economic situation. As a trader, the most important thing you need to know about, past the crisis is on how the federal reserve sees the market.

In this, you want to predict the pace of the normalization process. You can get a bigger picture by going to the website of the federal reserve and reading their comments and minutes from their meetings. By reading these minutes, you will be at a better place to understand how he officials think.

Interest rates

In your analysis, everything should always lead to interest rates. To better understand this, analysts use what is known as the Philips Curve. The Philips Curve gives a theory that explains the relationship of jobs and inflation. The theory says that inflation tends to go up when the unemployment rate falls. The idea is that when more people are employed, they tend to buy more leading to increased inflation.

On the other hand, when inflation rises, the central bank tends to raise interest rates to contain it. By raising rates, the country’s currency tends to strengthen as more people buy the currency for the yields.

Understand the economy of a country

As a trader, you need to do the best you can to know and understand the economy of the countries you are trading in. For example, if you trade in the dollar, you need to have a good understanding about the American economy off head. You need to be prepared to answer a simple question about the unemployment rate of the country or the current inflation rate or the GDP growth.

The same should apply to all the countries that you deal with on a regular basis as a trader.

7 Types of Economic Data That Traders Should Always Monitor

Getting and mastering all this information is not difficult. Still, you should not put yourself under pressure to know everything within a short period of time. It will take time for you to grasp all this. The key is to have interest and follow all the news as it breaks.

Why does macroeconomic analysis matter?

Macroeconomic analysis is crucial to traders, businesses, and the country’s government. To governments, evaluating the nation’s economic status is helpful in monitoring or adjusting the fiscal and monetary policies.

For instance, in 2020, economies across the world were struggling due to COVID-19. Customer spending was lower, unemployment levels were higher, and some businesses had to close shop. Subsequently, central banks and the governments acted by enacting policies meant to improve the situation.

In the US, the implemented measures included a quantitative easing (QE) program and lowering interest rates to near zero. It was a way of stimulating the economy back to its original glory.

Macroeconomic for traders

For traders, macroeconomic analysis helps in predicting price movements in different markets. For example, if one is keen on trading gold, newsworthy releases from the US will be of importance. This is because of the historical inverse relationship between precious metals and the greenback.

On the side of businesses, the macroeconomic analysis is a crucial tool in evaluating or formulating their strategies for global and domestic markets. For instance, if a country is undergoing an economic crisis, it may not be a suitable period for a multinational company to expand to the region.

Example of macroeconomic analysis

To get a better understanding of macroeconomic analysis, let’s use the United States as our example. Indeed, it is impossible to analyze the global economy without considering this western nation. With it being the largest economy in the world, it is an influential entity in geopolitical and economic matters alike.

If you intend to trade directly in the US dollar or indirectly via financial instruments impacted by the currency, you will need to evaluate the applicable macroeconomics entities. For instance, 2020 was a tough year for the greenback.

US Dollar index in 2020

There are several factors that influenced the currency’s price trend on a macroeconomic level. To begin with, you would need to look at the unemployment rate.

In January 2020, the US had an unemployment rate of 3.6%. In came COVID-19 and in April, it reached a record figure of 14.7%. This was an indication that businesses were recording lesser clients and returns, and that overall, the economy was struggling.

GDP and the inflation rate are also key elements in a macroeconomic analysis.

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