How Economic Data Affects Forex Markets

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The economic health of a country or region greatly affects how forex market participants assign value to the country’s currency. Forex traders pay close attention to economic announcements since these data sets can help provide clues about a country’s economic health. Generally, the healthier the country’s economy the stronger its currency is against other currencies.

Employment Data

The employment situation of a country’s economy is important for forex since employment is a key component to a prosperous economy. Most countries release data sets about the number of individuals currently employed within the country’s economy. Usually, strong employment figures are seen as bullish for a country’s currency.

Interest Rates

Forex traders give significant weight to interest rates when evaluating a currency’s market value. A country’s central bank’s interest rate is the most influential rate affecting that currency’s valuation in the forex market. A central bank’s interest rate is an important tool used for instituting a country’s monetary policy as well as for adjusting monetary supply.

Inflation

Inflation data measures increases and decreases in prices over a specific period of time. Increasing prices are viewed as an indication of inflation, which would in some market conditions suggest a currency’s depreciation since the currency’s purchasing power would be diminishing. However, in some market conditions, higher inflation signals the possibility of a country’s central bank raising rates sooner than expected which would cause speculators to be more bullish on the currency.

Gross Domestic Product

The gross domestic product (GDP) is one of the best measures of the overall economic health of a country. GDP measures all services and goods a country generates during a specific period of time. The higher the GDP data the more value a currency has in the forex market.

Consumer Spending

The strength of a country’s consumer is seen by traders as a reflection of the health of the country’s overall economy. This is why traders keep an eye on retail sales data which could provide insight into consumer spending. Increases in spending is seen as a sign of a strengthening economy. Durable goods data, which measures the amount of orders for manufactured goods, is another important piece of economic data associated with consumer demand.

Trade and Capital Flows

Trade between different countries around the world has a significant affect on forex market movements. This is based upon supply and demand forces pertaining to the specific currency. When a country imports more products and services than it exports this will apply downward pressure on the currency’s value due to a need for selling the country’s own currency.
Everyday there are numerous sets of economic announcements pertaining to various countries from all over the world. This can be quite intimidating for beginning forex traders at first. However, spending more time studying currency markets will help a trader determine which economic announcements are more important to one’s trading strategy.

Writer Bio

LeBach PhamLe Bach Pham has been writing professionally after receiving his Bachelor’s of Art in English Literature from the University of California, San Diego in 2002. He now specializes in writing about legal, business and financial topics. Pham also earned a Paralegal Certificate from the University of San Diego and has experience working in the legal field. He also has experience in writing business plans for clients from various fields, including banking, finance, retail, education, beauty and various other sectors.

Sources:

http://www.investopedia.com/university/forexmarket/forex5.asp

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