Direct Association Between News and Commodity Prices
Economic news and perceptions are very important when it comes to the foreign exchange market. A lot of investors are relying on economic news coverage to do their own research. The economic news and perceptions of the countries that affect the Forex market, such as the United States, are then affected by the decisions, policies, thoughts and feelings of the citizens of those countries. There is a lot of political intrigue in all countries, but the foreign exchange market is something that is very transparent, so everyone can see the flow of events. There are all sorts of economic news and perceptions that can affect the market, so one has to be aware.
The thesis of this article is that there might be a significant economic change coming and it is already being felt. Economic news and perceptions can have a large effect on the volume of currency pairs traded in the Forex market. If there is going to be a major economic change, which could affect the volume of currency pairs traded, then it would be best to look for the change in the volume of currency pairs. The thesis of this article is that a major economic change is coming and it is already being felt.
If you take a look at the past history of economic news, then you will notice that there are several occasions when expectations about an event have changed radically, resulting in large fluctuations in the Forex market volume. Take the 1997 Financial Crisis for instance. News about the European Central Bank buying Greek sovereign bonds triggered a huge increase in European sovereign bond prices, and this was used by many financial institutions as an opportunity to increase their own portfolio. At the same time, these institutions also increased their doubts about the sustainability of the European Central Bank, which led to even greater volatility.
This kind of economic change usually lasts for a short period of time, because most economic performance indicators are bimodal, meaning they are either up or down in a given period of time. For instance, the price level will tend to fluctuate upward, but it may only rise by a few points, or even disappear completely. Likewise, the volume of economy will either increase or decrease. There are times when expectations about an event are shifted out of proportion, causing a considerable change in the Forex market, which can be very negative for Forex traders. This is what we call a self-fulfilling prophecy.
A couple of years ago, there was a big discussion about the validity of the news media’s predictions regarding economic recovery. Some journalists and commentators claimed that economic recovery was merely a mirage, because no one could see any visible signs of economic recovery. On the contrary, economic recovery is taking place, so journalists and commentators are actually indirectly correct. Economic indicators are beginning to point to the direction of a pickup in GDP growth, but it is still early days. Moreover, the number of newspapers worldwide has been reduced dramatically, so there are fewer sources of news on economic issues. With all these factors, it is not surprising that economic performance indicators released by journalists and analysts show little or no connection to the real state of the economy.
One explanation for the relatively poor connection between economic indicators and the actual state of the economy is the relatively poor sensitivity toward financial risk. Many journalists and commentators are very sensitive toward news of negative corporate profits, bankruptcies, credit default rates, and other signs of a weakening economy. They pay too much attention to the downside of the economy without paying enough attention to the upside. Corporate profits are a good example of this sensitivity toward profit. The same tendency applies to news of rising fuel prices or falling home sales.
Economic news tends to have a much stronger impact on commodity prices than on overall price levels because commodity prices act as a measure of current inputs and production capacity. The tightness in credit markets is also likely to influence commodity prices because such a tightening of credit conditions weakens the economic future potential of producers of commodities. In the end, what really influences commodity prices is not the state of the economy, but rather what the central bank is doing. If interest rates are raised, the supply of loans goes up, and the economy improves, the cost of crude oil will drop. Oil prices are sensitive to any stimulus measures that are announced by the Federal Reserve. Economic news can also affect the United States dollar, which is very closely tied to the strength or weakness of the US economy.
Economic news and perceptions can therefore exert a powerful force on commodity and energy prices. Tightening credit conditions can reduce demand for oil and cause increased oil production. Conversely, if oil production goes up, it will take a negative impact on the US economy. Thus, expectations about the state of the economy have important ramifications on the supply, price, and quality of oil. This research uses a unique combination of economic indicators to examine the media effects of changes in the strength of the US economy.