When you’re out there conducting your fundamental analysis and researching the latest developments on the markets you are going to come across a lot of economic indicators. GDP, CPI, employment rates, etc, etc.
It’s all well and good finding this information, but what does it really mean and how does it impact the value of a currency?
In this section, we will break down the main economic indicators that you will come across and discuss what each of them signifies and how the markets will typically react to them.
Gross Domestic Product GDP
Let’s start with one of the big ones, GDP. Unless you have been hiding under a rock or you have never watched a news channel before, you will most likely have heard of GDP before.
Gross Domestic Product is the widest measure of the overall health of an economy. It is a way to measure the market value of a country’s goods and services. Because of this, it is used to determine how well or how poorly the country is performing economically.
It’s such an important indicator that this is what economists use to determine what stage of the business cycle we are currently in. If we see two consecutive months of negative GDP, this is what we call a recession. As soon as we enter a positive month the depression is considered to be over.
This is a good indication of the current sentiment around a currency. If the country’s economy is in a recession then there will be a higher likelihood that the value of that currency will fall. Something to keep in mind.
Note: It takes a long time to compile the data that goes into the GDP calculations. By the time the data is released most of the information is already known, so usually, it has little to no impact on the market. However, if the GDP figure is far from what is expected then it can certainly cause chaos in the market.
Non-farm payroll, or NFP, is a key economic indicator for the United States economy. As the USD is by far the most traded currency in the world, chances are you will be trading using it at some point in the future.
NFP is intended to signify the total number of paid workers in the U.S. excluding farm employees, government employees, private household employees and employees of nonprofit organizations.
It is one of the most significant economic indicators for the U.S. economy and the fluctuations in the market prove that.
It is normally released on the first Friday of every month at 8:30 am EST. You will definitely want to keep an eye on that date. Even in the days before the figure is released the market becomes particularly volatile in anticipation of the release as there are thousands of traders trying to second guess the market.
There will be a general expectation as to what the figure will be, but of course, this expectation is not always correct.
The higher the payroll number the better for the U.S. economy. This is definitely one to keep an eye out for, but be warned, the markets can get extremely volatile in these moments.
Consumer Price Index
The consumer price index, or CPI, measures the costs of goods and services by calculating the average price of a specific basket of goods or a service.
When the CPI changes this is a reflection of the rate of inflation which is a very important figure when it comes to currency trading.
It gives us an objective view of how quickly prices are rising or falling in the economy. This number is also released monthly in the United States and in the UK, so you need to keep an eye on these dates.
This metric is used to determine if the economy is on track with the projected inflation rates. If they are then this is good for the economy and will usually attract investment, if not then the currency may weaken.
Employment is one of the key indicators that signify the strength of a country’s economy and how well the government’s policies are performing.
There are a number of indicators you can follow to get employment statistics, one of the most significant is the NFP.
There is an Employment Monthly Report that is released once a month that displays the employment rate and the unemployment rate (given as a percentage of the total labour force).
The lower the unemployment rate the better it is for the country’s economy.
Interest Rates & Central Bank meeting
Any change in the interest rates is typically met with a huge reaction in the forex markets. These rate changes affect everybody and everything surrounding the currency; the buyers, sellers, importers and exporters.
The Central Bank of a lot of the major forex currencies has regular meetups each month to discuss the current state of the economy. Sometimes the bak can make drastic decisions such as altering exchange rates or implementing quantitative easing strategies.
These are huge events in the forex world and the markets will usually wait in anticipation during each of these regular meetings. Unless you have some key insider information, it’s best to be cautious and avoid trading around these periods.
Retail sales measure exactly how much consumers are spending in stores that sell goods. It counts all the receipts from our high street spending, grocery store visits, DIY trips, you name it.
This gives a great insight into how consumers are behaving and essentially how the economy is performing. If consumers stop spending money, the economy will stop working. Money makes the world go around, after all.
Retail sales figures are crucial indicators to the strength of the economy because if the consumers are spending, it means the profits of companies will be up and share prices will follow. This will attract investment and usually gives a boost to the country’s currency.