Forex traders look to sets of economic data known as economic indicators in order to determine the health of a country’s economy. This plays a significant role in determining the value of a country’s currency in the forex market. The most commonly used economic indicators measure productivity, inflation, employment and interest rates.
Gross Domestic Product (GDP)
Traders generally play close attention to the gross domestic product (GDP) as indication of economic growth in a country. GDP provides the total value of services and goods produced in a nation’s economy during a specific period of time. Increasing GDP figures indicate economic growth which is seen as positive for a country’s currency’s valuation in the forex market.
Consumer Price Index (CPI)
Forex traders keep an eye on inflation when determining the trajectory of future currency market movements. Inflation is the rise of prices for goods and services in an economy. While inflation is a sign of economic growth, if inflation increases too rapidly it can weaken the value of expendable income for consumers resulting in downward pressure on currency valuations.
Producer Price Index (PPI)
Another commonly used inflation measurement is the producer price index (PPI). This economic indicator measures fluctuations in prices producers are receiving when selling their products. The index excludes items which generally have more volatile price fluctuations such as food and energy. Excluding these items provides a clearer view as to the underlying core inflation trends in an economy.
Consumer spending in a country’s economy is an important stimulator of demand for that country’s currency. This is why employment reports are so influential in the trajectory of forex market movements. Increases in unemployment are considered negative for a currency’s value, while increases in employment is considered positive for a country’s economy. Some of the major employment reports include the U.S. non-farm payroll (NFP), Australia’s wage price index and the Canadian labor force survey.
A currency’s interest rate set by a country’s central bank has a large impact on how the forex market views currency values. The central bank’s “benchmark” interest rate determines the rates that banks lend money to each other to fulfill short-term operational requirements. It also influences commercial rates used by banks when lending to consumers and businesses. Many investors may be more apt to invest in a currency with higher interest rates in order to collect higher returns. Forex traders see this as increasing demand for the currency and therefore bullish for the specific currency that has increasing interest rates.
On the other hand, there is no set formula for interpreting information from economic indicators for making trading decisions. Various factors should be considered besides just the economic factor that a particular indicator is focusing upon. Also, trading decisions should also take into account one’s own risk appetite. Proper risk management is key for trading successfully in the forex market.
Le 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.