Fundamentalists are obligated to understand how economic indicators influence forex trading. If you are a beginner in understanding fundamental analysis, here is a useful guide.

Economic indicators are data released by the government or private organizations which can be used to see the economic performance of a particular country. After the release, there will be either a positive sentiment (optimistic) or a negative one (pessimistic) about the policy or economic condition of the country. This sentiment influences market player decisions and affects the country's exchange rate. As a trader, we should understand how to assess these so we can later conclude their influences on the pairs we trade. Some important economic indicators that affected forex are:

  • Unemployment Report: Reports about a country's unemployment.
  • Gross Domestic Product (GDP): Consists of the total market value of a country's goods and services.
  • Retail Sales: Measures the total sales of goods and services by retail establishments over a specific period.
  • Production Reports: Shows fluctuation in industrial productivity.
  • Trade Balance: A measure of a country's exports minus its imports.
  • Consumer Price Index (CPI): Measures the changes in the consumer's goods price in 200 categories .

economy indicators

These are some of the indicators that have relatively big influences on forex trading:

 

1. Unemployment Report

The first is unemployment report. When unemployment rises, it shows poor political power and bad economic condition. Therefore, rises in unemployment tend to decrease the exchange rate of a country's currency. If you trade USD, the number of unemployment you should check is the weekly Initial Jobless Claims and monthly NFP (Non-Farm Payrolls), among others. Economists tend to see both data as an indicator of whether a country's economy is strong. If there is less unemployment, that means the economy is strong. Traders would prefer to trade currency with strong economic background.

  • Jobless Claims: Jobless claims are a crucial metric for determining the number of individuals unemployed at any given period. When individuals file initial jobless claims, they apply for unemployment benefits as new claimants. It is worrisome for the economy when a rising number of job seekers cannot secure employment, indicating underlying weaknesses.
  • Non-Farm Payrolls (NFP): The nonfarm payrolls include approximately 80% of the total U.S. workforce, excluding certain job classifications such as farm workers and workers in specific industries. The Bureau of Labor Statistics (BLS) gathers information on nonfarm payrolls. This report comprises two surveys: the Household Survey, which focuses on individuals and their employment status, and the Establishment Survey, which provides insights into business establishments and their workforce.

An example is when the market speculates that Federal Reserve will have another rate hike. To confirm this, the market is waiting for the NFP release. Let's think that the chance of The Fed having another rate hike is 80% if the NFP shows a certain percentage of increased payroll. During this time, traders buy US dollars, causing the price to surge. However, when the NFP was released, it showed that the payroll didn't increase according to what the market speculated. This led the market to believe that the chance of a rate hike has decreased to almost 30%. They decided to sell the dollar and causing its price to drop.

 

2. Gross Domestic Product (GDP)

GDP is considered the most common indicator to assess the economic condition of a country. It is the total market value of a country's goods and services. GDP is usually measured quarterly instead of monthly or weekly because a more extended period is better for depicting the statistics of all products and services. A GDP report that exceeds expectations can potentially boost the value of a currency in the forex market.

In such cases, the currency may experience an increase in value compared to a currency with a lower GDP rate. Consequently, this indicator is not used alone in forex trading. GDP is a lagging indicator, a measured factor whose influence depends on its trend over time.

For example, let's say the US is scheduled to release its GDP reports soon. People speculate that the GDP will reach 1.1%, which causes people to buy the currency and increase its value. But, when it was released, the GDP rate reached 1.3%, higher than expected. This will make the US dollar surge. On the other hand, if the GDP is strictly at 1.1% or even lower at 0.9%, the US dollar might depreciate.

 

3. Retail Sales

This indicator shows the total receipt of all retail stores in a country. It is a reliable and essential economic indicator in developed countries due to the spending patterns of consumers, which are mapped all year. This factor is usually more critical than lagging indicators and gives a more precise description of the economic condition of a country. So, how do retail sales report affect the forex market?

  • When it goes up: When retail sales experience a controlled increase, indicating higher consumer spending and a healthier economy, the reference currency in the Forex market tends to appreciate compared to other currencies. However, if retail sales increase rapidly, surpassing the local production capacity, the currency may depreciate.
  • When it goes down: When retail sales decline, it generally negatively affects the economy, and the Forex market is not exempt from its impact. A decrease in consumer spending is often seen as unfavorable for the economy and can trigger a chain reaction with significant consequences. In such situations, the financial markets typically respond in a manner that reflects the economic downturn.

 

4. Production Reports

The next reliable economic indicator in forex trading is the Industrial Production Report. It signifies an actual fluctuation in industrial productivity, such as in manufacturing. This report shows actual production in relationship with its potential in a period. When a country produces at its maximum capacity, it will positively affect its currency's exchange rate as it is considered an ideal condition.

The Industrial Production report more or less will influence a country's import and export activities. Industrial production data tends to mirror broader economic trends, making robust figures a positive indicator for the dollar. On the other hand, weak data serves as a negative signal, suggesting a bearish outlook for the currency.

 

5. Trade Balance

Report on export, or trade balance, is the fifth indicator. A country's export is essential to be observed because it influences its trade balance. A minus trade balance, also known as a trade deficit, means that a country imports more products than it exports and owes more to foreign countries. This is why market players usually react negatively to increased trade deficits.

When a country's goods are in high demand, it tends to export more than it imports. This leads to an increase in the demand for its currency. On the other hand, when a country imports more than it exports, there is less demand for its currency.

 

6. Consumer Price Index (CPI)

Consumer Price Index (CPI) or inflation is the last but not least economic indicator in analyzing forex. CPI measures the changes in the consumer's goods price in 200 categories. If it rises and with it comes rumors of an upcoming increase in interest rate, then the currency's exchange rate will probably rise too.

Consumers and businesses find foreign goods and services more appealing due to their relatively lower prices in high inflation. As a result, imports tend to rise, expanding the currency supply within forex markets. This increased supply contributes to the depreciation of the currency.

 

Why Is the Economic Indicator Important?

Economic indicators play a crucial role in understanding and evaluating the health of an economy. These indicators provide valuable insights into various aspects of economic activity, such as employment, inflation, trade, and overall growth. They help policymakers, investors, businesses, and individuals make informed decisions and formulate strategies. Economic indicators allow us to assess the current state of the economy, identify trends, and anticipate potential changes or risks.

They provide a foundation for economic forecasting and planning, enabling policymakers to implement appropriate measures to stimulate growth or manage downturns. Additionally, economic indicators help investors gauge market conditions and make informed investment decisions. These indicators are essential for monitoring and analyzing the economic landscape, contributing to informed decision-making, and fostering stability and growth in local and global economies.

There are several ways to get information about economic indicators, but the easiest way is through an economic calendar. Technically, it's a tool that gives information about important economic events. Several brokers and platform has equipped their service with this tool. But, BrokerXplorer also provides an economic calendar for traders in need.