Yesterday's China GDP growth (20/1) was lower than its previous data. 2013 fourth quartal GDP was just 7.7%, definitely lower than the previous 7.8%.

Yesterday's China GDP growth (20/1) was lower than its previous data. 2013 fourth quartal GDP was just 7.7%, definitely lower than the previous 7.8%. However, Aussie strengthened, because it was more than what was estimated by analysts (7.6%). How is actually economic estimates influences market movements? In anticipation of upcoming UK releases, it is fitting to talk about it now.   

The Influence of Economic Estimates on Forex

 

Building Market Sentiment

In financial globalization, market dynamically moves quickly to keep up with changes from time to time. Market dynamics require its players to predicts whatever is going to happen in order to plan countermovements and the next steps just as fast. This is why market players need economic estimates.

However, only certain personages have the necessary equipment, skill, and knowledge to predict upcoming economic datas. Therefore, research institutions, government bodies, and news agencies are coming up to release their economic estimates some time before the periodical economic data releases. Those estimates, in turn, is one of several factors behind market sentiment toward a certain currency movements.

 

One of the most awaited estimates in financial industry is Bloomberg-released estimates. Bloomberg surveyed several analysts, and then seek a consensus of those analysts predictions. Because those analysts come with different backgrounds and views, then the consensus is a standardized number which is logical and sufficient to be applied.

The problem is, economists and financial analysts have one obvious weakness. Most of them don't count the reality on field that might have strong influence in statistics. UK's unemployment, for instance, has been linked with imigration and unemployment benefits. Its open door policy invites more foreigner to seek jobs in the UK. Beside of that, the ease of applying for jobless benefits evidently made some people choose the easy way of not working and live from benefits rather than working low-end jobs. However, these are out of ordinary economic analysist ranges, and increase the possibility of error.

Weather Forecast

business

Economic estimates could be compared to weather forecast. Let's say, today's weather forecast was fair and sunshine, then you decided to walk and enjoy the outdoors. Not five minutes out of the door, heavy rain fell. You'll be mad and panic because you've already made decision based on the wrong forecast. That was what happened with economic estimates.

Market players already set their motions based on the estimates, so when the actual data slipped from estimations, panic occurs. In the end, the market responses often have roots in the difference between actual data and estimates, not in the difference between the previous and current data. The impact of wrong estimates could go further if it has been used as the foundation of certain government or central bank's policy.

Economic estimations are used by many parties to make decisions, from beginner traders, big-time players, to central banks. When The Fed announced the first tapering last month, they did it on the 'estimation' that US economic recovery has gone steady. Market players see the moves as validation on the same estimation. That's why, when last week NFP fails to meet its estimates, the market reacted not only toward NFP estimates, but also doubted the predictions on recovered US economy. Greenback instantly fell down.

Forex market spontaneously reacts to such news, although half forex traders might not concern themselves with fundamentals. Estimations and other predictions have become one important indicators in forex market.  

The estimates for upcoming release of UK unemployment data have been released by various institutions, including Bloomberg. Consensus predicted unemployment will fall from 7.4% in the previous period to 7.3%. Apart from that, Claimant Count Change (the number of people applying for unemployment benefits) also estimated to fall from -36,700 to -35,000. The aforementioned estimates along with the skyrocketed retail sales yesterday, have build positive sentiment toward GBP in the market. It is going to be interesting to see GBP movements tomorrow, as the BoE is going to release MPC (Monetary Policy Commitee) meeting minutes around the same time.

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